Why Every Retiree Needs a Balance Sheet

Why Every Retiree Needs a Balance Sheet – (0:00)

Alek Johnson: Welcome, everyone. We’re just going to give everyone a minute or two to jump in here. I can see our participants are climbing steadily right now, so we’re just waiting a minute.

This is my favorite time of the year. I’m a big fan of March Madness, so I’m not going to talk too much about how my own team did. Utah State had more of an abysmal performance than I would’ve liked. But for a lot of you jumping on here, I’m sure there are a lot of Cougar fans. BYU is in a good spot right now—hopefully, they can get it done.

I know that I have Jeff Sevy on here with me. I know he’s not rooting for them at all.

Jeff Sevy: Not true.

Alek Johnson: Okay, I think we’re in a pretty good spot, so we’ll go ahead and dive in. There we go—“Go Cougs” is already coming through in the chat.

I’m going to go ahead and share my screen here, and we can get going.

First and foremost, I just want to say thank you very much for taking the time to jump on this webinar with us. As a financial advisor, I love working with couples and individuals one-on-one, getting to know my clients in a more personal way. But I also really love this webinar setting—just the group setting—being able to talk to and present to a large number of people at once.

So thank you for tuning in when I’m sure you have plenty of other things you could be doing at lunch right now.

For those who don’t know me, my name is Alek Johnson. I am a Certified Financial Planner™, one of the lead advisors here at Peterson Wealth.

Before we dive in today, just sticking to the status quo here, we have a couple of quick housekeeping items.

First, just to give you a gauge of timing—this should be a quicker webinar today. I think around 20 to 25 minutes is where we’ll settle in, so a little bit shorter. But hopefully, we’ll still give you some really good information to take with you today.

If you have any questions at all during the presentation, my colleague Jeff Sevy is online with us. He will be helping answer through the Q&A feature located toward the bottom of your screen. Feel free to use that to submit any questions.

I also like to take some time at the end of each of my webinars—three to five minutes or so—to go through any questions that apply to the group. I’m happy to chat and go through those with you.

If you have more of an individualized question, please feel free to either reach out to your advisor if you’re a client with us here at Peterson Wealth, or if you’re not a client, please feel free to just email us or schedule a free consultation. We’re happy to help you in that manner as well.

Last but not least, as always, at the end of the webinar there will be a survey sent out to give me and our team some feedback on future topics. Please, please utilize that—it’s always so helpful. You’ve already given us so much good feedback that we’re trying to incorporate into our future webinars. The more you share, the better for us. So please take the time to fill that out for us today.

Just a quick disclaimer: nothing in this webinar should be taken as investment, tax, or legal advice. It should be used for general purposes only. Obviously, I don’t know what each of your individual situations looks like—that’s why we encourage you to reach out if you have specific questions. But hopefully, you can glean some good value out of today’s topic.

Why Does a Balance Sheet Matter? – (4:03)

As you know, today we are going to be talking about balance sheets. Why are we doing that? Why is a balance sheet important to have?

My background is in accounting, so if you’re like me, sometimes when you hear the term “balance sheet,” you immediately jump to corporate finance. In my undergrad, that’s all I was doing—looking at balance sheets.

Investors use a company’s balance sheet to understand its overall financial health, liquidity, profitability, and a bunch of other aspects to decide if they want to invest in it.

At first glance, it doesn’t really seem like something the average person needs to have. But in reality, a personal balance sheet is one of the most powerful financial tools a retiree can have.

It’s much more than just a list of what you own and what you owe. It’s a financial snapshot at any given point in time that helps you make smarter decisions, reduce your stress, and uncover potential opportunities.

In my opinion, having a balance sheet can really be the difference between kind of drifting through retirement—or confidently being able to navigate it.

To help today’s webinar stick a little better—this is going to be a little cheesy—but I want to take you back to when I was in college at Utah State.

For about a nine or ten-month stint, I worked as a jewelry salesman up in Logan, Utah, at a company called S.E. Needham Jewelers. The picture you see here is with another sales professional we had invited to come in. He gave us some tricks of the trade.

Anyway, I’m happy to report that as young and goofy as I was, I was able to help a lot of happy couples get engaged. It was a good time—but really, that’s not the point of me walking down memory lane with you.

When I was there, we would always take the time to educate couples—or individuals—on what we called the Four Cs of diamonds.

You’re probably familiar with this yourself, right? The four Cs of diamonds: cut, color, clarity, and carat.

We’d pull out the different diamonds, let them look under the magnifier, and talk about the differences between each diamond. The four Cs always seemed to stick with people. When they’d come back, they’d say, “Okay, I thought about it more. I want a better color,” or “I want better clarity,” or “a bigger carat size.”

So today, to help this webinar stick, I’m going to give you what I’ve termed the Three Cs of the Balance Sheet.

The Three Cs are why having a balance sheet should matter to you:

  1. Control

Your balance sheet will help you stay in control of your finances. Most retirees don’t have all their assets in one place. They might have an IRA at Fidelity, a Roth IRA at Schwab, a 401(k) with their previous employer, their home, maybe a second home, and various checking and savings accounts at different banks. Everything ends up scattered.

Now, individually, each of those accounts might seem manageable. But collectively, it can be a lot—especially without a centralized document that shows all your assets and liabilities in one place.

Without that, it’s easy to lose track. You can make uninformed decisions—or assume everything is fine until it isn’t. Control is number one.

  1. Clarity

A personal balance sheet, in my opinion, forces clarity. It gathers everything into one place and says, “Here’s where I stand.” That clarity is a powerful tool and often reveals things you wouldn’t have seen otherwise.

It also allows you to have better conversations—with your spouse, your financial advisor, your children, or other professionals. When everything is visible, clear, and organized, decision-making becomes a lot more straightforward and collaborative—rather than overwhelming.

  1. Confidence

Many retirees don’t actually know how wealthy they are without a balance sheet. A well-structured balance sheet can offer a comforting realization of, “Hey, we’re okay,” when you see that bottom line. On the flip side, it can also be a wake-up call: “Okay, we need to make some adjustments to get to where we want to go.”

Overall, a balance sheet helps you gain confidence—either in where you stand now or in creating a plan to get to where you want to be down the road.

Breaking Down Your Balance Sheet – (9:00)

So those are the Three Cs. Keep that in mind—that’s going to be the main focus of this webinar.

In a few minutes, I want to talk about the benefits of having an updated balance sheet, so you can see what control, clarity, and confidence you can gain from having that document in place.

But first, I want to briefly touch on how you set up and create your balance sheet so we’re all on the same page. Let’s go ahead and break this down.

A personal balance sheet gives you a clear, organized snapshot at a specific point in time. It’s made up of two primary sections:

  1. Assets – what you own.
    These are items with value that you could sell, use to produce income, or convert to cash. This is the good stuff—what everyone wants to have.
  2. Liabilities – what you owe.
    These are your obligations, debts, or future payments. Together, your assets and liabilities determine your net worth.

Liabilities are not inherently bad, even though they reduce your net worth. We’ll talk more about that in a bit.

Once you’ve listed everything, subtract your total liabilities from your total assets. That result is your net worth.

When you create your balance sheet, your assets should be listed in order of liquidity—from the most accessible (cash) to the least liquid (real estate or personal property like collectibles).

A note on personal property: this section is optional. My general rule of thumb—if it could realistically be sold for over $5,000, consider putting it on. Otherwise, it may just clutter the statement. You don’t need to list your couch or TV. But if you have art or other collectibles worth more than $5,000, definitely consider including them.

A few other tips when listing your assets:

  • Include the account name
  • The institution where the account is held
  • The account type (IRA, Roth IRA, joint, trust, etc.)
  • And the titling—whether it’s held individually, jointly, or in a trust

Also, make sure to use realistic and current market values—not what you think it’s worth or what you paid for it.

Your liabilities should be listed from short-term to long-term. I also suggest including the creditor name, the interest rate on each liability, and the monthly payments you are making. If you know the payoff date for any liabilities, I would include that as well when you’re creating or updating your balance sheet.

Once both sections are complete, you’re simply going to take your total liabilities, subtract them from your total assets, and that will give you your net worth.

This is your financial scoreboard, so to speak—tying it back to March Madness, right? The scoreboard of your net worth shows what you’ve accumulated and gives you a good baseline you can track over time as you progress through retirement.

Pro Tips for Creating or Updating Your Balance Sheet

Here are some quick, friendly pro tips when you’re updating or creating your balance sheet. A few of these we’ve already touched on, so I won’t spend too much time there.

  • Update it at least annually.

Set a date—whether it’s the beginning of the year, after you file your taxes, or even your birthday (although that might make for a sad birthday!). The point is: your assets grow, your debts shrink, and things change all the time. So get in the habit of updating it at least once a year.

  • Be honest and accurate.

Use realistic market values—not what you hope it’s worth or what you paid for it. This is especially true for things like real estate or collectibles. Don’t inflate the value of your assets, even though we tend to have a bias as owners to think they’re worth more. But also don’t deflate them either—get a market value that’s realistic and current.

  • Don’t include income or expenses.

This is a common point of confusion. Your balance sheet is not your income statement. Both are great tools, but they are different. So when creating your balance sheet, don’t list out your monthly spending or income. This is strictly a snapshot of your assets and liabilities.

  • Label ownership clearly.

Titling really matters—especially for estate and tax planning implications. Be sure to label whether the asset is held individually, jointly with a spouse, in a trust, etc. And while you’re at it, make sure your beneficiaries are up to date, and that you know who the beneficiary is on each of your accounts.

Benefits of Having an Updated Balance Sheet – (14:50)

Pretty straightforward, right? I assume most of you have created a balance sheet at some point in your life. So for many of you, this is probably more of a refresher than anything new.

Now let’s talk about the benefits of having an updated balance sheet.

I’ve had many great conversations and made strong planning decisions for clients simply because we first reviewed their balance sheet. Having this one document updated and in place can make a big difference. Here are a few key things we’ve discovered from it.

It drives smarter decisions.

First, it brings clarity to your investment decisions.

For example, when reviewing retirees’ balance sheets, I’ve often found they have an improper asset allocation. You might be investing appropriately inside your 401(k) or IRA, and think you’re allocated well. But if you’re also holding a large sum of cash on the side—just because you like a bigger emergency fund—that cash can impact your overall It might make you more conservative than you need or intended to be.

Another common situation: you may be well-invested overall, but not strategically invested across your different accounts.

Let’s say you want to be 60% stocks and 40% bonds in your overall portfolio. Many retirees split that 60/40 ratio evenly across their IRA and Roth IRA. But a potentially smarter strategy would be to invest the Roth IRA more aggressively—to capture market growth 100% tax-free—and keep the IRA more conservative.

So you still maintain the 60/40 balance overall, but now you’re directing more of the growth to a tax-free account, which can significantly benefit your long-term wealth.

It improves cash management.

Many retirees unknowingly hold excess cash spread across multiple bank accounts—checking, savings, etc. These funds often sit idle and earn little to no interest, which creates a huge opportunity cost.

With a balance sheet, it’s easier to identify surplus cash and redirect it to better options—like a high-yield savings account, CDs, a money market fund, or even short-term bond funds.

I’ve seen retirees with hundreds of thousands of dollars in cash earning 001% interest, while high-yield savings accounts were offering 4–5% during that same time. Some banks simply don’t reward savers, and unless you’re paying attention, that lost interest can add up quickly.

Cash management is a huge benefit we find with the balance sheet.

Confidence in Your Debt Strategy

It also helps us have better confidence in our debt strategy.

Often, retirees—and really just people in general—assume that all debt is bad, but that’s not always true. Some debt, like a low-interest mortgage, might be strategically kept as part of your financial plan.

In fact, I’ve recommended holding onto a mortgage instead of paying it off, several times. A balance sheet brings that conversation to the forefront. It allows you to ask questions like:

  • Is this debt manageable?
  • Could paying it off improve our cash flow or peace of mind?
  • What asset would we use to pay off that debt?
  • Can we incorporate the debt into our retirement plan?

All of these decisions become clearer when you have your balance sheet in place.

Identify Red Flags

Another great benefit of a balance sheet is that it helps you identify red flags.

One of the biggest advantages is that it brings things to the surface—things that may have been hiding in plain sight for years.

For example, you might come across an old 401(k) from a job 20 or 25 years ago that you forgot about. You wouldn’t believe how many clients have come in—some of whom I’ve worked with for years—and said:

“Alek, I got this thing in the mail about my 401(k) from a firm I worked at years ago. Do you know if there’s any money in there?”

And I’m thinking, I didn’t even know that account existed! It’s not necessarily a huge problem, but it can be a missed opportunity if that money isn’t invested properly. Having a balance sheet helps us track that kind of thing.

Another common red flag is mismatched account titling. For example, you may meet with an attorney to create a solid estate plan—establishing a trust and a will—but still have a joint account that should be titled in your trust. Or you might have a brokerage account with no named beneficiaries.

These things can create big headaches later if they’re not cleaned up now. I promise you, your kids will thank you endlessly for doing this now, rather than having to sort it all out after you’ve passed.

And while it’s not as common, we sometimes find lingering debt issues—a credit card balance, or a home equity line of credit with a high interest rate quietly growing in the background.

Knowing what you owe is just as important as knowing what you own. That knowledge gives you the control and confidence to deal with outstanding debt. We’ve caught some really high-interest debts this way—ones clients weren’t even aware of.

Improves Tax and Estate Planning

A balance sheet isn’t just helpful right now—it’s also incredibly useful for future planning. It improves coordination with your CPA, financial advisor, estate attorney, and other professionals by giving them a full financial picture.

From a tax planning standpoint, it helps uncover opportunities. For example:

  • Are you sitting on appreciated stock in a taxable account that could be donated instead of triggering capital gains?
  • Do you have a large portion of your savings in pre-tax retirement accounts that could lead to large Required Minimum Distributions (RMDs) down the road?

Having the full picture allows us to evaluate if Roth conversions might be a good strategy to reduce future tax headaches.

These kinds of questions can’t be answered without knowing what’s where and how much is in each account. A balance sheet sets the stage for thoughtful tax planning, rather than reactive tax filing.

When it comes to estate planning, the same applies. Account titling, beneficiary designations, and estate documents all depend on knowing what assets exist and how they’re structured.

With a good balance sheet, we can discuss:

  • What will pass through the will vs. directly to beneficiaries?
  • Are all of your assets properly titled in the trust?
  • Can accounts be consolidated to make things easier on your heirs?

One recent example from another advisor in our office: a client had their mother’s house titled in their own name, which meant they were not going to receive a step-up in basis when their mom passed away. That advisor was able to help retitle the property appropriately.

These details matter, and a balance sheet helps you streamline estate settlement for your loved ones down the road.

Tracking Your Financial Plan Over Time

Perhaps the biggest benefit of a balance sheet is that it helps you track your overall financial plan over time. One of the biggest problems I see when people create a balance sheet is that they do it once, feel accomplished—”We did it! Got it done!”—and then they don’t look at it again for years.

But financial planning isn’t a one-and-done event. It evolves—and it can evolve quickly. Your assets grow. Your spending changes. Your debts get paid off. Your goals shift.

By updating your balance sheet regularly, you can see if you’re building wealth, maintaining it, or starting to spend it down. It helps answer important questions like:

  • Are we on track?
  • Is our net worth holding steady?
  • Have our liabilities been reduced, or is interest still accumulating?
  • Are we using our money the way we intended?

A balance sheet creates an ongoing conversation rather than a one-time report. That’s the biggest gap I see—people are great at creating it once, but they don’t go back to compare over time.

However, your balance sheet is one of the best indicators of whether your plan is actually working.

Summary – (25:22)

In retirement, it’s not enough to hope your finances are in good shape. You need visibility. You need structure. And you need the ability to make informed decisions as your life continues to change and progress.

A personal balance sheet provides you with just that. It’s not about spreadsheets (even though some of us—myself included—love Excel). It’s about staying in control, getting clarity on your planning decisions, and moving through retirement with confidence.

So I highly recommend making your personal balance sheet a living, breathing part of your financial life. It’s one of the best tools you can have, and I truly believe it will help you be set up for long-term success.

Alright, quick and easy—hopefully I didn’t go too long there.

Before I open it up to questions with Jeff, I just want to mention, hopefully all of you already have a copy of the book Plan on Living by our founder, Scott Peterson. If not, please feel free to request it. It’s completely free, and we’ll get it sent out to you in the next day or two.

If you’d like to share a copy with someone, email us. We can send it directly to them or to you if you’d prefer to deliver it yourself.

Lastly, thanks again for attending today. I know you probably had other things you could be doing here at noon on a Wednesday, but I appreciate you taking the time to join.

And one more plug for the survey—if you wouldn’t mind filling that out, letting us know what you thought and what topics you’d like to hear more about, we’d be grateful!

Question and Answer Session – (27:13)

Okay, Jeff, I’ll turn it over to you. Any questions that we got?

Jeff Sevy: Ya, we have one or two here that would be easy to answer.

Q: Can Peterson Wealth work as a financial planner prior to retirement—like one to two years out?

Alek Johnson: A: The short answer is yes. The longer answer, it really depends on your situation. As fiduciaries, our goal is to put your best interest first. Some people are comfortable managing things on their own up until retirement, which is a major transition from accumulation to distribution. That shift brings a lot of change, and it’s often a great time to link up with a planner. If you’re ready to offload some of the complexity, we’re happy to help.

Jeff Sevy: Q: Should I list CDs as short-term or long-term assets?

Alek Johnson: A: For the most part, list them as short-term. Even though you can get longer terms on CDs, they’re still fairly liquid. If needed, you can access them early with a small interest penalty.

Jeff Sevy: Q: Does it make sense to use investments to pay off my mortgage?

Alek Johnson: A: It depends. Sometimes yes, sometimes no—it depends on what type of accounts you’d be pulling from. If everything is in an IRA or 401(k), paying off the mortgage might trigger a big tax hit. But if you have assets in a brokerage or trust account, it might make more sense. Reach out to us—we’re happy to walk through it with you.

Jeff Sevy: Q: What goes into the decision to pay off a mortgage early or keep it?

Alek Johnson: A: A few key factors come into play, but the biggest is usually your interest rate. This one really depends on your personal situation. If you’re pulling from a 401(k) or IRA, all of that will be taxable. Depending on your tax bracket, that could mean paying 12%, 22%, or more in taxes just to eliminate a mortgage with a 3% interest rate. That’s a tough tradeoff.

Jeff Sevy: Q: How do you determine the actual value of assets?

Alek Johnson: A: For brokerage and retirement accounts, the values are straightforward—just look at your most recent statements. The market value is usually up to date.

For assets like real estate, collectibles, or art, you’ll want to get an appraisal. That small investment up front can go a long way in giving you an accurate sense of what your assets are worth—especially when doing estate planning or calculating net worth.

If you’re unsure what something is worth or whether it’s worth including, feel free to reach out to us and we can help point you in the right direction.

Jeff Sevy: Q: If I already own my home, is there any reason to take out a mortgage before retirement?

Alek Johnson: A: That’s a loaded question. For most people, I’d lean toward no. If your home is paid off, it’s typically best to keep it that way.

But there may be very specific situations where it makes sense—perhaps for liquidity, investment opportunities, or estate planning. That’s something we’d want to discuss one-on-one so we can evaluate your numbers and goals.

Thanks again to everyone who joined us. If you haven’t already, please fill out the post-webinar survey. It helps us improve these sessions and gather ideas for future topics you’d like to see.

We appreciate your time and hope you found this session helpful. Enjoy the rest of your day!

Taxes In Retirement

Taxes In Retirement – Welcome to the Webinar (0:00)

Carson Johnson: Good afternoon. Welcome, everyone. Thank you all for joining me.

I’m so excited to be with you on this beautiful, technically still spring, afternoon to talk about the exciting topic of taxes.

I know you probably think I’m crazy for finding this a fun topic, but I actually do enjoy taxes. It’s interesting that when it comes to taxes, retirees always find it a big and important topic.

While we’re waiting for everyone to join, I’d like to quickly introduce myself. My name is Carson Johnson. I’m a Certified Financial Planner™ and one of the lead advisors here at Peterson Wealth Advisors. Joining us virtually today and manning the Q&A and chat is Josh Glenn, one of our Certified Financial Planners™. If you have any questions, feel free to use the Q&A feature at the bottom of your Zoom application, and Josh will get to your questions as they come up.

A couple of housekeeping items: We’ve received a lot of interest in today’s webinar, so I expect the presentation to be about 30 to 40 minutes, with a short Q&A afterwards. For anyone who can’t stay for the entire time, don’t worry. We are recording this webinar, and there will be an email sent out tomorrow with the link to the recording.

At the end of the presentation, there will be a survey. Thank you to those who have been filling these out; it’s super helpful for us to get feedback and improve our presentations. It also helps us understand the topics you want to hear about.

Another quick disclaimer: The information we discuss today is not considered tax, legal, or investment advice. All information discussed is for general informational purposes only. It’s important to remember that everyone’s situation is different, and you should discuss any ideas you glean from our conversation today with a qualified professional or tax advisor.

Let’s go ahead and jump right in. Today, my hope is to cover five main areas regarding taxes in retirement:

  1. How retirement impacts your taxes
  2. The taxation of different types of retirement income
  3. The taxation of different types of investment accounts
  4. What Roth conversions are and when you should consider them
  5. Other tax traps and planning strategies to consider in retirement

How does retirement impact your taxes? (3:10)

First, how does retirement actually impact your taxes? This is a big topic that is usually top of mind for retirees. For some, the impact may not be significant, but for others, it could be. Many studies say that taxes can be one of the largest expenses in retirement, so it’s a topic that shouldn’t be overlooked and should be carefully thought through.

Retirement Income Sources and Tax Implications

One of the major changes upon retirement is where your income comes from. Before retirement, income primarily consists of wages earned from working for an employer. In retirement, income usually comes from various sources, such as social security, pensions, rental income, or income from your portfolio, including IRAs, investment accounts, and Roth IRAs.

These different sources of income can present some challenging tax situations in retirement but also offer important planning opportunities. While all income sources eventually flow through to your tax return, not all are taxed in the same way or at the same rate. Retirees may be able to structure their income to minimize taxes and create a more tax-efficient income stream. However, without careful planning, they could end up with a less tax-efficient income stream or pay unnecessary taxes.

Today, we’ll discuss some of the rules to be aware of. By understanding some basics, you can significantly impact not only your retirement outcome but also how long your assets will last in retirement.

Changes in How Retirees Pay Taxes

Another major change upon retirement is how retirees pay their tax bills. Many retirees are used to having taxes withheld from their paychecks by their employers. In retirement, this responsibility falls squarely on your shoulders. It’s important to understand what taxes retirees are subject to and how they pay them.

Payroll Taxes and Retirement

One tax that goes away upon retirement is the FICA tax, which stands for Federal Insurance Contributions Act. This U.S. federal payroll tax consists of two parts: the Social Security tax, which is 6.2% of your gross wages up to a cap, and the Medicare tax, which is 1.45% of your gross wages with no cap. Upon retirement, you are no longer subject to these taxes because FICA tax pertains only to payroll taxes, leaving many retirees having to pay only federal and state income taxes. We’ll discuss one other category that retirees may be subject to in just a minute.

Also, as a quick note and an important distinction related to payroll taxes and deductions: once you’re retired, you’ll likely no longer be contributing to a 401(k) or an employer HSA, or have other deductions that you might have had during your working years. Even though these additional deductions aren’t taxes per se, they are expenses that will likely go down in retirement.

Methods for Paying Your Tax Bill in Retirement

So, if you’re no longer associated with an employer, how does a retiree pay their tax bill? Ultimately, there are two methods that retirees can use to pay their tax bills.

The first method is called tax withholding. Tax withholding is money that is withheld and sent directly to the IRS or state from one of your retirement income sources. This is similar to the elections you make on your paycheck, where you can specify a specific dollar amount or percentage to go towards taxes. This can be a great way to cover your tax bill, as it is fairly easy to set up and manage.

However, it’s key to be aware that you need to specify a certain dollar amount or percentage, so you’ll have to do some thinking and calculating to determine how much you should be withholding to cover your tax bill at the end of the year. Examples of where tax withholding might apply include pensions, IRA and 401(k) distributions, and Social Security. Note that Social Security only allows federal withholding, not state.

The other method to cover your tax bill is through estimated payments. This method is generally used by self-employed individuals who don’t have the other sources of income listed above. They typically have a non-retirement account and are probably already used to paying taxes this way. With this method, you pay taxes to the IRS throughout the year on a quarterly basis. This method can be more cumbersome than having tax withholding, as you have to send money in either by mailing a check or setting up a direct deposit on the IRS.gov website.

Importance of Timely Tax Payments

As a general suggestion, tax withholding is generally easier to manage. Although this may seem like a small adjustment for many of you, for some retirees it is a big change. You have to think about how much to withhold because some might think they can just wait until the end of the year to pay their taxes and figure it out then. Unfortunately, our tax system works differently; it’s a pay-as-you-go system, meaning it’s important to pay your tax bill in a timely manner throughout the year to avoid underpayment penalties.

These penalties are essentially an interest rate that the IRS charges on the amount you underpaid. Currently, with higher interest rates, this penalty is about 7-8% and can be substantial. The goal of withholding is to withhold enough to avoid underpayment penalties, but not so much that you end up with a big tax refund. A major misconception is that a tax refund is a gift from the government, but it’s actually just a refund of your own dollars that you overpaid. There’s no reason to give the IRS an interest-free loan when you could be using those funds for something else.

Ordinary Income Tax for Retirees

Moving on to the next topic, I want to discuss the two categories of taxes that retirees are generally subject to. The first is taxation on ordinary income. When I refer to ordinary income, I mean income sources such as wages, taxable withdrawals from retirement accounts, taxable Social Security benefits, annuity distributions, pensions, and more.

Each of these income sources is taxed as ordinary income, meaning they are taxed based on your tax rate or federal tax brackets. We have the tax brackets for single filers and married filing jointly, showing based on your income what the tax brackets are. Our tax system is progressive, meaning not all of your dollars are taxed at one rate.

For example, if you’re a married couple with a combined ordinary income of $180,000, the first $23,200 is taxed at 10%, the next $71,000 is taxed at 12%, and the remaining portion of that $180,000 is taxed at 22%. It’s important to figure out your tax rate and the average or effective tax rate among these blended rates to make informed decisions. This could be for determining how much to withhold on your pensions and Social Security to cover your tax bill or for making other decisions such as whether to do a Roth conversion or other tax planning strategies.

There are calculators online that you can use to figure out your effective tax rate, or you can work with a CPA or financial advisor who can project this out for you.

Capital Gains Tax in Retirement

Now, the second category of taxes a retiree may pay is called capital gains tax. This tax only applies if you’re selling an investment or an asset in a non-retirement account, or if you’re selling other assets such as a business interest or investment properties other than your primary residence. So, if you only have a 401(k) or an IRA account, this won’t apply to you. However, some retirees do have non-retirement money, and I think it’s important to go over this.

So, what is a capital gain? Simply put, a capital gain is when you sell an asset or property for more than what you originally paid for it. For example, let’s say you buy Apple stock for $50,000, and over time it grows to $120,000. If you then decide to sell it, you would report the difference of $70,000 as capital gains income on your tax return.

Capital gains are taxed at different rates depending on how long you’ve held or owned that investment. There are two categories to be aware of:

Short-term capital gains

These are gains realized on investments or assets sold after holding them for less than a year. The tax rate for short-term capital gains is the same as your ordinary income tax rate.

Long-term capital gains

These are gains realized on investments or assets sold after holding them for more than a year. Long-term capital gains are taxed at preferred rates of either 0%, 15%, or 20%, depending on your income level.

It’s important to understand a couple of key rules. First, short-term and long-term capital gains must be reported on your tax return in the year that you sell the investment. Second, capital gains only occur when you sell an investment for a profit. For example, if you hold Apple stock in your brokerage account and it appreciates in value, you won’t pay taxes on that growth until you actually sell the investment.

Short-term capital gains are taxed at your ordinary income tax rate. So, wherever you fall in the tax brackets we discussed earlier, that rate will apply to your short-term capital gains. Long-term capital gains, on the other hand, get preferred treatment and are taxed at lower rates.

Tax Strategies for Short-Term and Long-Term Gains

A common issue with short-term capital gains is that some retirees or investors may own investments that generate significant short-term gains, leading to higher taxes. For instance, mutual funds managed by fund managers who buy and sell investments frequently can result in substantial short-term capital gains being passed down to shareholders, causing unnecessary tax burdens.

One strategy to mitigate this is to be cautious of mutual funds and other investments that generate short-term capital gains. Holding investments long enough to qualify for long-term capital gains rates can significantly reduce your tax liability.

Understanding Tax Loss Harvesting

Another related tax strategy is tax loss harvesting, which can be very beneficial. Tax loss harvesting allows you to sell an investment in a non-retirement account at a loss and use that loss to offset other taxable income on your tax return.

For example, let’s say you bought Apple stock for $50,000, and the stock market drops, reducing the value to $40,000. You could sell the stock, report the $10,000 loss, and use that loss to offset other capital gains or income, potentially reducing your overall tax bill.

Some might think that selling an investment at a loss is not a good idea, which is true to an extent. However, the goal of tax loss harvesting is to strategically use losses to your advantage by offsetting gains or income and lowering your tax liability. This strategy can be especially useful in volatile markets where some investments may experience temporary declines.

Reinvesting After Tax Loss Harvesting

Remember, the key to successful tax planning in retirement is understanding how different types of income are taxed and using strategies like tax loss harvesting to manage your tax liability effectively.

So the other part of tax loss harvesting is not to just stay out of the market, but to take those proceeds from what you just sold and reinvest them into another investment. In this case, I mentioned Johnson & Johnson as an example. This is not a recommendation, but just to illustrate the point.

The reason for this strategy is that once you sell the investment and immediately reinvest, you can stay invested and benefit when the market bounces back and recovers. This allows you to take advantage of the losses while still staying invested over that period of time.

Now, an important rule to be aware of with this strategy is that whatever investment you’re buying back has to be substantially different from what you just sold. You can’t simply sell Apple stock at a loss and then buy back Apple stock later. This is due to a rule called the wash sale rule, where the IRS may not allow you to take advantage of those losses if you do that. So, whatever you’re buying back has to be substantially different, but it can still be a great way to reduce taxes and other income that you report on your return.

Taxation of Social Security Benefits

Now let’s move on and talk about the taxation of Social Security—another big-ticket item that a lot of people have questions about. In many instances, more money can be saved by minimizing tax on Social Security than strategizing on when you should claim your Social Security benefits. This is not to say that you shouldn’t do your homework and run some analysis on whether you should claim now, at age 67, or at age 70, but the focus today should be more on how you can minimize tax on your Social Security benefits themselves.

I won’t go into all the nitty-gritty details of the taxation of Social Security, but the IRS has a formula that states the more money you make outside of your Social Security benefits, the more your Social Security benefits will be taxed. For example, let’s say you’re married filing jointly and your provisional income—which is your combined income plus half of your Social Security benefit and tax-exempt interest—is under $32,000. In that case, none of your Social Security will be subject to tax. If your provisional income is between $32,000 and $44,000, then up to 50% of your Social Security will be subject to tax. If your provisional income is over $44,000, then up to 85% of your Social Security is taxable. I’ve also listed the single-filer version of income as well.

A couple of key takeaways here: First and foremost, not all of your Social Security benefit is taxable, unlike other sources of income such as pensions or IRA withdrawals where 100% of those distributions are generally fully taxable. This can be a consideration as you’re creating your income stream. Another point to note is that the way to reduce tax on Social Security is to reduce other sources of taxable income.

Strategies to Minimize Taxes on Social Security

I want to give you a couple of examples of how you can minimize taxes on Social Security benefits. First is to reduce other income with tax-advantaged investments. If you’re generating a lot of interest, for example, in a bank account or investment account, you may want to consider investing in higher interest-earning investments in an IRA where you’re not taxed on the interest you earn, only on the withdrawals. This can help you avoid taxes on Social Security benefits.

Sometimes people think you should invest in municipal bonds, but remember from the formula, tax-exempt interest from municipal bonds is also included, so you can’t avoid that with municipal bonds.

The second way is to anticipate your Required Minimum Distributions (RMDs). If you have an IRA or 401(k), at some point you’ll be required to withdraw a certain amount of money from those accounts, which is currently at age 73. If not properly planned for, RMDs can turn into a big tax nightmare later on, pushing you into higher tax brackets or impacting other aspects of your retirement.

The third strategy is to delay Social Security. By reducing the number of years your benefits are subject to tax, you can ultimately reduce the overall amount of taxes paid. Delaying Social Security might also give you more time to implement other tax strategies like Roth conversions, tax loss harvesting, or others.

Lastly, consider doing a Qualified Charitable Distribution (QCD). We’ve discussed this in past webinars, but it’s worth mentioning again. A QCD allows you to withdraw money from an IRA tax-free as long as it goes to a qualified charity. If you regularly give to charities or churches, this can be one of the best ways to reduce the amount of tax you pay on your Social Security benefits. You have to be at least age 70½ to do this, but it can be a great strategy to consider later on.

Taxation of different account types (25:11)

Now moving on to the next area of taxes in retirement: understanding the taxation of different account types.

So before you can begin creating a tax-efficient stream of income, you need to understand the basics of how your investment accounts are taxed.

Broadly speaking, there are three types of accounts, each with its own unique tax advantages:

  1. Tax-Deferred Accounts: These include accounts like 401(k)s, traditional IRAs, and similar. Contributions to these accounts are made pre-tax, meaning you get a tax benefit by reducing your taxable income in the year you make those contributions. Once you make those contributions, you can invest those dollars, and the investments grow tax-deferred. This means you’re not taxed on any gains, interest, or dividends earned while the money is within the account. However, you will eventually be taxed on those dollars, especially when you start taking Required Minimum Distributions (RMDs). Withdrawals from these accounts are 100% subject to income tax.
  2. Tax-Free Accounts: These include Roth 401(k)s and Roth IRAs. Contributions to these accounts are made with after-tax dollars, so you don’t get a tax benefit in the year you make those contributions. However, the investments in these accounts grow tax-deferred, and if you meet certain conditions, withdrawals from these accounts can be completely tax-free. The conditions typically include being over 59½ and having held the Roth IRA for at least five years.
  3. Taxable Accounts: These include bank accounts, high-yield savings accounts, and investment accounts at institutions like Fidelity or Charles Schwab. These accounts are funded with after-tax dollars and provide flexibility since you don’t have to wait until age 59½ to withdraw funds. However, you pay taxes on dividends, interest, and any gains from selling investments for a profit in the year they are earned.

Generally speaking, because taxable accounts are funded with after-tax dollars and you’re only paying taxes on the growth, these accounts, along with tax-free accounts, are generally more tax-efficient. However, it’s important to remember that no single account type is inherently better than another. It takes careful consideration to determine which accounts you should contribute to and how much you should contribute.

Every person’s situation is different with their pensions, Social Security, and investments, so it requires individual analysis to determine the best contribution strategy. As general advice, it can be beneficial to have a mix of all these account types to provide flexibility and tax diversification, allowing you to structure your retirement income in the most tax-efficient way.

It’s important to remember that a retiree can’t and often won’t make good decisions about reducing taxes in retirement without first mapping out and projecting what their future retirement income will look like. Towards the end, we’ll go over a case study of how we do this with our Perennial Income Model™, our proprietary way of handling retirement income. But before that, let’s hit on a few other important items.

What are Roth conversions and when should I consider them? (29:40)

Next, let’s move on to Roth conversions. What are Roth conversions, and when should you consider them? This is another big question that comes up regarding taxes in retirement. You hear about Roth conversions in the news and media, and sometimes retirees get carried away with this strategy. So, it’s important to understand the basics and why we do them.

As we discussed before, virtually all retirement accounts are classified into one of two categories: pre-tax money (like IRAs and 401(k)s) or post-tax money (like Roth IRAs and Roth 401(k)s). For most retirees, it’s common to have retirement accounts that are pre-tax dollars. A Roth conversion allows you to take pre-tax money and convert it to an after-tax account like a Roth IRA or Roth 401(k). Keep in mind that pre-tax means you haven’t paid any taxes on that money, so whatever amount you choose to convert becomes taxable to you in the year of the conversion.

Because of this, it’s uncommon to convert an entire IRA or 401(k) to a Roth account all at once, as it would create an unnecessarily large tax bill. The advice we give is to convert enough to gain the future benefits of the Roth account but not so much that it pushes you into a higher tax bracket. This involves some projections, whether on your own with online calculators or with the help of an advisor or CPA. You need to project what your retirement income will look like and what your tax rate will be today versus later.

Ultimately, the decision boils down to whether you want to pay taxes at today’s rate or wait and potentially pay at a lower rate in retirement. This is why understanding and projecting your future retirement income and tax rates is crucial.

Converting Pre-Tax to After-Tax Accounts

Now, I want to leave you with three last considerations when thinking about Roth conversions:

First and foremost, consider where you will live in retirement. This might seem like an odd consideration, but some states partially or entirely exclude certain retirement incomes, such as distributions from an IRA or Roth conversions. Some states may not have any state income tax at all. If you plan to move to one of these states, you might want to wait to do Roth conversions until then. Alternatively, if you currently live in a state with no state income tax, like Texas, Florida, or Nevada, you might want to consider doing more Roth conversions now to avoid state taxes if you later move to a state with income tax.

Location and State Tax Considerations

The second consideration is to identify who will benefit from the Roth conversion. If the goal is to create a tax-efficient stream of income for yourself, focus on your specific situation, tax rates, and how the conversion will affect you. If the goal is to leave money to heirs or if your spouse is likely to outlive you, think about how Roth conversions can benefit them. This context will help guide your decisions.

Lastly, while we’ve discussed tax rates extensively, it’s also important to consider how Roth conversions can impact other aspects of your retirement plan, such as Medicare premiums, which is commonly overlooked.

Many people don’t realize that Medicare is not free; there is a premium that you must pay. Moreover, Medicare premiums are based on your income. The more income you report, the higher your premiums will be. Medicare looks at your income from two years prior. For example, your 2024 Medicare premiums are based on your 2022 income. The thresholds work like tax brackets, where higher income can move you into a higher IRMAA (Income-Related Monthly Adjustment Amount) bracket, resulting in surcharges.

Everyone pays a base level premium for Part B, which is $174.70 per person per month. However, this can increase depending on your total combined income. Excessive Roth conversions can push your income higher and thus increase your Medicare premiums.

If you’re just getting onto Medicare and were in your highest earning years two years ago, it might feel punitive to pay higher premiums. Remember, it adjusts yearly based on your income from two years prior. However, Medicare recognizes life-changing events that might reduce your income, such as marriage, divorce, death of a spouse, or work stoppage. You can request relief from Medicare by filling out form SSA-44 if you expect your future income to be lower.

For example, I had a client who was a retired Delta pilot with high earnings nearing a million dollars. When he retired, Medicare sent a letter indicating his premiums would be in the highest IRMAA bracket, about $1,200 per month for him and his wife. We filled out form SSA-44, estimated their future income, and submitted it to Medicare. They accepted it, and it saved him hundreds of dollars per month, amounting to a few thousand dollars by the end of the year, simply by being aware of this rule. So, be aware of it; it can be a huge tax-saving opportunity.

Case Study: Structuring Retirement Income

We’ve covered a lot of strategies here. I know we’re coming up on the hour, so I want to wrap up with a case study to illustrate how you can properly structure your retirement income.

So, for those who aren’t familiar with this plan on the screen, this is an example of our retirement income plan, which we call our Perennial Income Model. I won’t go through all the details of how it works, but if you want to learn more, there is a video on our website that you can watch for a detailed explanation.

Ultimately, this plan matches your current investments with your future income needs. For example, when you take your investment portfolio, we spread it across different segments, each representing five years of retirement income.

Let’s say we have a married couple with a million-dollar portfolio, which is split across three different accounts: a taxable brokerage account, an IRA, and a Roth IRA. The income generated from these investments per month, plus their Social Security, equals their total monthly income.

By running this plan, we can project what their future retirement income will be and what their tax rate will be in retirement. A common question is, “Where should I be drawing my income from?” In this particular case, the clients are 67 years old, and most of their portfolio is in an IRA, which would push them into higher tax brackets once they are required to withdraw money at age 73.

So, we may want to do some Roth conversions in the early years. We decided to live on the taxable brokerage account for the first five years. This account has very low taxes, providing more flexibility to do Roth conversions, which will be taxable.

Then, we decided to use IRA money for segments two, three, and four because, at age 73, they’ll be required to withdraw money due to Required Minimum Distributions. They can also take advantage of qualified charitable distributions, withdrawing money tax-free from IRA accounts as long as it goes to a qualified charity.

Lastly, we chose to use Roth IRA accounts towards the end of the plan to maximize tax-free growth for 20 to 25 years. This can benefit the client if they live longer than expected or if they need funds for long-term care.

You can see that this plan can be adjusted in many ways. For instance, you could draw part of your income from the IRA and part from the taxable brokerage account and Roth IRA throughout your retirement to stay in a low tax bracket. It requires some thought on how to organize your accounts and understanding the taxation of your retirement income sources.

To summarize, tax planning is incredibly important for retirees at all stages of life. However, ages 55 to 73 are crucial for planning. There are major milestones during this period, such as claiming Social Security, Medicare premiums, accessing retirement accounts, and Qualified Charitable Distributions.

Take advantage of these planning opportunities to create a tax-efficient stream of income.

Here are five key insights to remember:

  1. Retirement may change the way you manage your tax liability.
  2. Understand how your investment accounts are taxed and organize your retirement income plan in a tax-efficient way.
  3. The amount of your Social Security that is taxable is based on your combined income.
  4. Roth conversions can minimize taxes in retirement with proper planning.
  5. Be aware of retirement tax traps that might impact other aspects of your retirement, such as Medicare premiums and short-term capital gains.

Question and Answer (42:45)

That’s it for today. Thank you for bearing with me. I apologize for going a bit longer. We’ll now leave the next few minutes for any questions you may have. If we don’t get to your questions today, please send us an email. We would love to address them.

Let’s see if we have any questions. One question is, “If I’m still working and my spouse retires, can I keep my spouse on the work health plan, or is it mandatory to go to Medicare?”

You do want to make sure that once your spouse turns 65, they apply for Medicare Part A to get that started. However, it is not mandatory for them to go on Medicare if they can stay on your work health plan. You can still have your spouse be covered by your work plan if you want to if it’s more cost-effective that way. Good question there.

Is the Medicare premium a monthly premium?

Yes, it is a monthly premium.

What happens when you sell stocks at a loss?

What’s the maximum you can claim on losses? Good question. You can actually harvest an unlimited amount of losses, but the way you use those losses works a little differently. You can offset as much capital gains as you have with as many losses as you have. However, if you don’t have any capital gains to offset those losses, you’re limited to offsetting $3,000 of ordinary income, such as Social Security or IRA distributions.

Is there a date when the RMD will change to 75 years old?

Yes, in 2033, the RMD age will move to 75.

If your spouse is a retired military member and can go on TRICARE at age 60, how does that impact Medicare? Vicki, please send us an email about that. There are a few things to consider, not just the cost of Medicare and TRICARE, but also ensuring you apply at the right time and that it’s considered coverage for Medicare purposes.

Don’t you have to sign up for Medicare at age 65, or do you lose benefits?

You don’t necessarily lose benefits, but if you don’t sign up at the appropriate time at age 65, your Medicare Part B and D premiums could be penalized. That’s why it’s important to be covered by your employer’s health insurance plan or sign up for Medicare at age 65.

What is the current range for Medicaid premiums?

If we’re talking about Medicare premiums, the range depends on your income. Whatever you show on your tax return will determine your Medicare premiums. Medicare premiums do adjust for inflation, so the base amount of $174.70 will adjust over time.

How is the sale of my primary residence treated for capital gains?

There’s an important rule for primary residences. If it’s your primary residence, you can exclude part of the capital gain. I believe it’s $250,000 if you’re a single filer, and $500,000 if you’re married filing jointly. For example, if you bought the house for $100,000 and it’s now worth $1 million, you would have $900,000 of capital gains. Since it’s your primary residence, you can exclude $500,000 if you’re married or $250,000 if you’re single. It works differently for your primary residence.

We’ll take one last question here, and then we’ll wrap up.

Can you provide additional information and rules on QCD, the Qualified Charitable Distribution?

You can withdraw money tax-free from an IRA account as long as it goes to a qualified charity. A couple of rules to be aware of: you have to wait until you’re exactly 70 and a half years old before you can begin using that strategy. You would work with your IRA provider, like Fidelity or Schwab, to fill out a form that allows you to do that. The other important rule is you can’t do a QCD from a 401k account; it must be from an IRA account. There is also a maximum of $100,000 that you can do, but we don’t often see people reach that maximum.

One last question related to the residence:

If it’s a secondary residence, how does it work for capital gains?

Generally, you can only elect one primary residence. If it’s a secondary home, it’s probably not your primary residence, so you don’t get that exclusion. Look into it a bit closer; there may be ways to apply for both depending on how long you’ve lived in each of those homes.

Thank you, everybody. Great questions. Thank you for participating. Again, there will be a survey, please fill that out. Thank you all for joining me, and I hope you have a great week. Thanks.

Navigating Retirement Planning: Why Your Retirement Portfolio Needs Stocks

Navigating Retirement Planning: Why Your Retirement Portfolio Needs Stocks – Welcome to the Webinar (0:00)

Alek Johnson: Welcome, everyone. We’re just going to give it a minute here for everyone to get filed in. We had quite a few participants sign up, so we’re just going to give it a minute or two while everyone files in.

Daniel, while we’re waiting, do you have any good Easter plans coming up?

Daniel Ruske: Oh, we do. My wife’s cousins from Canada are coming down for Easter. They have the spring break off, so we’ll be showing them around Utah. We might go down to Manti and check out that open house. We might—my in-laws are heating up the pool, so at least we’ll get in the hot tub. Depending on the weather, we might get in the pool as well. What are you doing?

Alek Johnson: Oh, I’m just—we’re just pretty much hanging out at home. Easter egg hunt, all the good stuff. So nothing too crazy, but great.

Daniel Ruske: You wanna get this started a minute after maybe?

Alek Johnson: Yeah, I think we’re kind of slowing down on people flowing in, so I’m gonna go ahead and share my screen, and I think we will go ahead and get started here. Alrighty. Perfect. Well, good afternoon and welcome, everyone. I hope you’re gearing up for a fun Easter and enjoying the day so far.

My name is Alek Johnson. I am a Certified Financial Planner™ and one of the lead advisors here at Peterson Wealth Advisors. I’m excited to be here with you today to essentially make the case on why your retirement portfolio needs to have stocks. This is one of the presentations I’ve actually wanted to do for quite a while now, as it’s one of those topics that seems to always be on the mind of our current clients, those prospective clients looking to work with us. So anyway, I’m excited to go through it with you.

My goal today is to keep this presentation around 40 to 45 minutes long. It’s definitely a little bit longer presentation than I usually like giving, but there’s just a lot of great content to cover. Before we dive into things, as always, just a couple of housekeeping items.

First and foremost, if you do have any questions during the presentation, feel free to use the Q&A feature located at the bottom of the Zoom to ask any questions. As you saw my colleague Daniel, who’s also a Certified Financial Planner™ and one of the leads here at Peterson, he will be answering those questions as you go. And then at the end, I’ll take probably around four or five minutes or so and answer some general questions that come through that Daniel doesn’t have time to get to or that he thinks would be really good to address in front of everyone.

Also, at the end of the webinar, there will be a survey sent out to give me some feedback on how the presentation went, as well as suggestions for any future topics. So, please feel free to stick around and fill out that survey for us. As a side note here as well, there will be a recording of this webinar provided for you tomorrow.

Okay, so here’s a quick agenda of what I want to go through with you today. We’re going to start off by going through two big retirement challenges, and then I’m going to go ahead and make the case for why you need to invest in stocks within your retirement portfolio. Following that, I’m going to address some common concerns that we get when talking with clients, prospective clients about investing in the stock market. And then I’ll end just by giving a few insights and maybe quick tips on how to incorporate stocks within your portfolio.

A boring part here, but it has to be said before I jump in. I do need to say that this is not investment advice, but just for general purposes only. Obviously, I don’t know all of you, but I do know that you all have very unique financial situations. When it comes to investments, there’s no one-size-fits-all plan for everyone. So that being said, I do still hope you find this presentation informative and meaningful. And then I would encourage you to either reach out to your advisor if you’re a client, or just reach out to any member of the team if you’re considering working with us if you do have specific questions about your own financial plan.

So that being said, let’s dive on in.

Understanding Retirement Challenges (4:30)

So how I view it is there are two big challenges that retirees face when it comes to their investments. Now, this is not to say that retirees only have to worry about two financial issues in retirement. Obviously, there are other financial concerns, such as healthcare concerns, tax concerns, fraud, and so on. The list is definitely ongoing. But when it comes to your investments, these are two of the most common concerns that people want to discuss when they walk through the door. It’s longevity and inflation.

Over the last 200 years, life expectancy has increased dramatically due to advancements in public health, medical technology, nutrition, and really just general living conditions have gotten better. We are living better, and we are living longer. So naturally, as an investor, therein lies the problem, right? The question becomes, am I going to outlive my money, or is my money going to outlive me?

So let’s just take a quick glance at how long we’re expected to live. So this is a life expectancy table for those who are currently age 65. As you can see, a man age 65 has a four, let me grab my laser pointer here, make it a little easier. A man age 65 has a 44% chance of living until age 85, and a 23% chance of living until age 90. These odds rise significantly for females. A woman has a 55% chance of living until age 85 and a 34% chance of living until age 90. Here’s the scariest part of this table for me: There is a 49% chance that at least one member of a couple will live to age 90 and a 20% chance that they will live until age 95.

Retirement Challenge 1: Length of Life

Living too long has morphed from a risk into a stark reality, and retirement planning investment strategies have to accommodate this new reality. By the way, as a little side note here, predictions for children born today suggest that, as long as there are continued advancements in medical technology, they could live on average beyond 90 years. That’s an average number for children born today in countries with higher life expectancies.

Retirement Challenge 2: Inflation

Challenge number two is that of inflation. Inflation is really the thief in the night that steals your future day by day until the once prosperous retirement lifestyle that you worked so many decades for is just gone. In reality, most victims of theft by inflation don’t even realize they’ve been ripped off until it’s too late.

So historically, the average inflation rate has been about 3% annually. To put that in perspective, at a 3% inflation rate, a dollar’s worth of purchasing power today will only purchase 40 cents worth of goods and services 30 years from now. That’s a 60% cut in pay if you don’t keep your investments up with inflation over a 30-year retirement.

Another way of looking at inflation is that in 30 years, at just the 3% inflation rate, you’ll need to have $2.45 to equal the same purchasing power that a dollar has today. What that means for you is you’ll be paying $10.70 for a gallon of milk, $243 to put 20 gallons of gas in your car, $23 for your favorite combo meal at your local restaurant, and more than $118,000 for a new average-quality mid-size car.

Retirement Challenge 3: Healthcare Expenses

An additional inflation concern is that of healthcare-related expenses. Obviously, retirees spend more on healthcare than any other group, and inflation for healthcare-related items is growing at about double the national inflation rate. Like longevity, inflation is not a risk or something that may happen; it’s a reality and something that is happening. And I think over the last couple of years, with inflation being a little bit higher, it’s definitely caught more attention than it has in the past.

So given the one-two punch of longevity and inflation, it is imperative that retirees are mindful of that as they invest for their future.

Stocks (8:54)

Now that we understand those two challenges, I want to talk about a solution and why you need to invest in stocks within your portfolio.

Before I get too far, I want to make sure I clear the air on what I mean when I say stocks. A stock represents a share in the ownership of a company. When you purchase a share of stock, you become a partial owner of the company whose stock you purchased. As an owner of the company, you are entitled to all the profits and growth that are associated with that company according to the proportion of the company that you actually own.

The companies that you see on the screen here, and many others, are some of the most profitable companies the world has ever known. The stock market is simply the marketplace where buyers and sellers of these shares of the corporation come together. Think of it like your Facebook Marketplace, where all of your neighbors are selling their 35-year-old bikes and the poker table they hand-built 20 years ago. The stock market is where you go to buy and sell stocks. It’s really that simple.

Now, there are many different ways you can buy stocks. You can buy individual stocks, for example, you could go and buy Delta, Apple, or Microsoft’s stock and nothing else. Another way you can do it is through mutual funds or exchange-traded funds (ETFs), which invest in more than one company. Most of you are likely exposed to stocks through the mutual funds and ETFs that you own in your own 401(k)s.

For today’s presentation, when I refer to stocks, I am referring to the stock market in general, not any particular company. To clarify that even further, I’ll be mainly talking about the S&P 500 index, which you’ve probably heard of before. The S&P 500 is regarded as one of the best gauges of American equities’ performance and, by extension, the stock market overall. The S&P 500 essentially consists of 500 leading publicly traded companies in the United States. You’ll see it referenced all the time in the news and other prominent media outlets.

Here at Peterson Wealth Advisors, we are very much prominent believers in investing in the market as a whole. We passively manage our investment portfolios and use index funds, such as the S&P 500, to manage our client’s assets. So please do not come away from this saying, “Well, Alek told me to go buy Apple or Costco.” Because if my boss, Scott Peterson, catches one whiff of that, I’d probably be fired on the spot.

Alright, enough of the definitions. Some of you may already be thinking at this point, “Well, this stuff is way too confusing. Why does it matter anyway if I’ll just avoid stocks altogether and not even worry about any of this?” Well, you can’t do that, and let me explain why.

So, stocks have historically offered higher growth potential over the long term compared to other asset classes like bonds or cash equivalents. Although they come with higher volatility, stocks have consistently provided substantial returns to outpace inflation over extended periods, which is crucial for building and preserving your wealth.

So what we’re looking at on the screen right now is a chart showing what would have happened if you had invested one single dollar into the stock market back in 1926, which is essentially when we started tracking the markets, and what the result would have been at the end of 2022.

Since 1926, a single dollar invested into treasury bills would be worth $22 today, with a 3.2% rate of return. Since 1926, a dollar invested into long-term government bonds, getting a 5.2% rate, would be worth $131, and a dollar invested into large U.S. stocks or the S&P 500 would be worth $11,535 today.

Now, some of you may be thinking that I made a mistake, I promise you I didn’t. How could an account that averages 10.1% be worth 88 times more than an account that averaged 5.2%? The answer to that is compound interest. I’m going to talk about that here in just a minute.

But first, let me add this little wrinkle in here and show you the impact of inflation and demonstrate why stocks are so important. The end results that we just went through, you can see that 10.1%, that 5.2%, that’s $11,500 here up here. Those are based on what’s called the nominal rate of return or essentially the rate the actual investment received. So for example, the S&P 500 actually went up 10.1% year after year.

However, if we were to apply the effects of inflation, we would be looking at what’s called the real rate of return or an inflation-adjusted rate. So let’s just use the stocks and bonds here for our example. For bonds, instead of 5.2%, if we apply inflation, which it’s a little more difficult than just saying subtract inflation there, the calculation is a little more complex than that. But essentially you get 2.2% after inflation. What that means is instead of $131 at the end, you’d end up with a whopping $8.

Now let’s take a look at the stocks instead of 10.1%, as demonstrated it’s closer to 7% after inflation is accounted for. This means that instead of ending with that $11,535, you would end with $717. Inflation, as you can see, takes a major toll. We can’t avoid stocks because having a portion of our money in stocks is the best way I know to truly beat inflation.

Now, I mentioned earlier that the reason stocks can be worth 88 times more than bonds is because of compound interest. Albert Einstein said that compound interest was one of the most powerful forces in the universe and the eighth wonder of the world as he described it. Likewise, I’m also very impressed by compound interest. It’s really almost magical. Uh, so just so you know, compound interest is when an investment or a debt earns interest on top of interest, on top of interest, and so on.

Those who figure out how to harness the power of compound interest are wealthy. Those who are in debt and allow this power to work against them are typically forever poor. The key to a successful retirement income plan is to continue to have the magic of compound interest work on your behalf.

Now, a simple math calculation reveals how compound interest works. This is often referred to as the rule of 72. You’ve, you may have heard of it before. By the way, this is a great thing to teach your kids and grandkids, not only will they think you’re smart, but they’ll be forever grateful to you.

So what you do with the rule of 72, you take 72 and divide it by whatever return you get on your investment. What the result is, is the amount of time it would take your investment to double in value. So, for example, 72 divided by a 10% return would take 7.2 years to double in value.

So if I were to expect an 4.8% return on my $100,000 investment, then I would divide 72 by 4.8. And I know that it takes 15 years for my initial investment to double. So at year 15, you can see I’d have $200,000 in another 15 years, I’d end with $400,000 Using that same formula, we find that getting money twice the return of 9.6%, is equates to 7.5 years to double seven and a half years.

Now, none of this information may seem that spectacular until you look at the results over a long period of time. Uh, as you can see at the end of those 30 years, just by having double the return, you actually end up with four times the amount at the end of that 30 year period, not double. You end up with four times.

Now, I just wanted to remind you of this principle to drive home the importance of getting a good return on your investments throughout retirement. Historically, those great returns are harnessed through stocks.

Common Stock Market Concerns (17:35)

Now this sounds great, I know, just talking about the returns, but obviously there are concerns when it comes to the stock market, and I want to take some time to address those concerns right now. As you can all likely guess, the first and probably most feared concern is that of volatility. The stock market is very well known for its fluctuations where values can dramatically rise and fall in short periods of time. This unpredictability can be pretty intimidating for individuals who are risk averse or unfamiliar with how the market operates, which leads to fears of loss with their investment.

How to Deal with Market Volatility

So how do we deal with volatility? Well, to start, I think it’s important to first understand the differences between volatility and risk. The people who believe that stocks are too risky and must be avoided, oftentimes fail to discern the difference between these two. So properly understood, volatility is merely a synonym for unpredictability. It has neither negative nor positive connotations. It just means it’s unpredictable. Risk, on the other hand, refers to the chance of a loss occurring and the severity of that potential loss. Understanding the distinction between these two terms can help frame your investment strategies and expectations more accurately.

Imagine you’re planning a road trip from New York City to Los Angeles. The volatility in this scenario could be compared to the variability in weather conditions that you’ll encounter along the way. Some days might be sunny and clear, while others could bring heavy rain or even snow, depending on the route you take and the time of year you travel. This variability in weather affects your daily driving experience but doesn’t necessarily stop you from reaching your destination.

On the other hand, the risk of the journey involves the possibility of events that could significantly impede or halt your progress. Examples include your car breaking down in the middle of nowhere or running out of gas money along the way. These risks could lead to substantial delays, additional costs, or even force you to abandon the trip entirely. Again, risk is where there is the possibility of experiencing a permanent loss. Volatility only contributes to the permanent loss when poor decisions are made.

Many inexperienced drivers have wrecked their cars because they were not prepared for a severe storm on the road, or they lacked the patience to wait out the storm before continuing their drive. They made poor decisions in temporarily volatile situations and let their emotions override sound judgment.

Financial storms, such as stock market downturns, are similarly frightening but usually short-lived. The experienced investor is prepared for the frequent volatile gyrations that the stock market presents. In contrast, the unprepared and emotionally driven investor may turn a temporary volatile storm into a permanent loss by panicking and selling their stocks at a loss.

History of Bear and Bull Markets

Let’s take a closer look at the history of our financial storms. This chart shows the history of bear markets in the United States. Since World War II, a bear market, defined as a drop of about 20% in value from a market’s previous high, has occurred approximately 15 times. They’re very common, occurring about every five to six years on average, although the declines vary in their severity, frequency, and duration. On average, the stock market retreats about 31.7% in a bear market and lasts about 11.1 months, just under a year. After which, the stock market rebounds and reaches new highs.

Given the very real possibility that your retirement could span two or three decades, you’ll likely experience five or six bear markets. It’s important to become accustomed to them. You can’t abandon stocks when they’re down because as sure as bear markets come, the bull markets, or the good times when the market bounces back, will surely follow.

I’ve included a chart of the bull markets since World War II on the far right-hand side. Take a look at some of these returns: 267%, 228%, 582%, 400%. The average bull market rises by 148% and lasts just over four years. Most investors often miss the point by worrying about avoiding the next 30% drop instead of focusing on participating in the next 300% or 400% bull market.

It may also interest you to know that since the end of World War II, the S&P 500 has averaged an 11% annual return. In other words, if you had invested a thousand dollars in 1945, it would be worth 3.4 million dollars today.

Just to reinforce this, here’s a quick glimpse of how those returns look on a timeline. I know this may be a bit small on the screen here, but the blue shades represent the bull markets—the good times.

The yellow shades on the bottom represent the bear markets or the bad times. I would like to put this in perspective with the timeline because it really shows that the bull markets last a while and the bear markets are often short-lived.

Liquidity of Stocks and Misconceptions

Here’s another way of looking at volatility and how we can manage it. In this chart, we’re looking at the S&P 500, again, since 1937. What we’re showing here is the probability of receiving a positive return over the various periods shown at the bottom. For example, since 1937, if you had bought stock each day and liquidated at the end of the day, you would have made money 53% of the time and lost money 47% of the time.

If you had bought stock each month and liquidated at the end of the month since 1937, you would have made money 63% of the time and lost it 37% of the time. If you had bought stock at the beginning of each year and liquidated at the end of the year, the figures are 77% and 23%, respectively.

If you had bought stock every January 1st of every year since 1937 and kept your money invested for five years, you would have made money 93% of the time and lost 7% of the time. Over 10 years, the success rate is 97% with only 3% losses.

And here’s the kicker: There has never been a 15-year period where you would have lost money in the S&P 500. What does this mean? Well, it means that if you invest in stocks for the long term, you are very likely to make money on your investments. It also shows us that where you’re pulling income from in retirement probably shouldn’t be invested in stocks as if you look at it day by day. There’s no real certainty, a good chance of winning or losing on those days.

Another common concern we get is about wanting investments to be liquid, and this just makes sense, right? People’s financial goals change, their lifestyles change. And so here’s the good news: With stocks, they are extremely liquid. Mutual funds, stocks, ETFs—they trade day in and day out throughout the market. This liquidity provides flexibility, allowing investors to adjust their portfolios in response to changing financial goals or market conditions.

So the question then is, why is there always so much confusion surrounding the liquidity of stocks? Well, unfortunately, there are companies out there that seek to exploit your fear of the stock market to instead get you to invest your money in highly illiquid products. Here is one of those products: it’s called an indexed annuity, and I’m sure you’ve all probably heard the sales pitch before, right? They’re really good at it. How would you like to have a product that’s tied to the stock market and lets you participate in the gains?

But is it guaranteed to not lose money when the markets go down? I can tell you I would love that. I would be all for it. And as enticing as those sales pitches are, the devil’s always in the details.

First, these products have caps or limits on how much they will pay when the market goes up. For example, if the market went up 10, 15, 20, even 30% in a given year, these products only give you the prevailing market cap, often set between three to 7%. So if it goes up 30%, you might only get five percent, and they pocket the other 25%.

Second, index annuities don’t participate in the dividends of the underlying index they follow. This is significant because about a third of the S&P 500’s returns historically can be attributed to the dividends of the underlying companies of that index.

So if you choose to invest through an indexed annuity, you automatically slice your profits by foregoing future dividend payments. Third, here’s where the liquidity comes in. These products often have severe penalties if you liquidate your investment before the surrender period expires. Surrender periods are imposed because the insurance companies that create these products pay a large commission upfront to the agent who sold you the product.

If an annuity owner cancels their annuity before the surrender period expires, they can recoup the commission paid to the agent by taking it out of your investment. These surrender periods can typically last seven to ten years, and the charges run as high as 10%. So it’s important to be cautious about getting into them as well as getting out of them, as it can definitely be costly to you.

Now, rest assured, you can invest in the stock market in much simpler and more liquid ways, such as mutual funds, ETFs, or your 401(k)s. You are always participating in the market with these different funds.

The third concern we commonly get is that people are afraid to invest because they might let their emotions get the best of them. Previous generations of retirees received monthly pension checks. Most members of this generation, and definitely the next, will not be that lucky. Over the last couple of decades, the responsibility to provide a stream of retirement income has shifted from the employer to the employee. We’ve gone from pensions to 401(k)s and 403(b)s. So, you should consider yourself very fortunate if you have a pension.

The responsibility the employee has of saving, investing, and even distributing those funds in retirement is pretty daunting. Most employees are not prepared for the task. They lack the training, education, or experience to manage their investments effectively.

And then there are some people who become good at accumulating wealth and then find that distributing it in retirement is a whole new ball game. It’s a difficult task. Unfortunately, no matter your skillset, the responsibility to grow and properly distribute your retirement nest egg is yours. You all became investment managers, whether you like it or not.

As you can imagine, with little training, Americans have proven to be pretty awful investors. According to J.P. Morgan, the average investor achieved only a 3% return over the last 20 years. They would probably have been better off sticking to any one of these other asset classes shown on the left of this chart. The only factor that explains this blatant underperformance is the investor’s own irrational behavior—emotional decision-making. It appears they followed a herd mentality: buying when stocks were high and selling in a panic when they were low. Plain and simple, there is a lot of misconceptions and confusion when it comes to investing.

Incorporating Stocks into Your Retirement Portfolio (30:25)

So, this leads me to my final portion of the agenda today, which is incorporating stocks into your retirement portfolio. Hopefully, these next few slides will give you better ideas on how to invest in stocks and how to keep your emotions from getting the best of you.

The first and foremost plan of attack when looking to invest in stocks is to set your investment goals and know your time horizon. I stress this because oftentimes people don’t even understand why they are invested in what they are. It could be because a favorite news channel talked about it, a friend recommended it, or they set it up 30 years ago when they started working and never changed it. Having a clear goal creates a path for why you’re investing in a particular way.

Time horizon is the length of time you can stay invested before you need to access those funds. Longer time horizons allow for more aggressive investments, as there’s a higher potential for market fluctuations to smooth out as I demonstrated previously. Time horizon goes hand in hand with your financial goals. Someone who needs to access their money in a year or two will not want to invest in stocks, whereas someone who’s investing for a 30-year retirement will want to.

For this reason, I recommend matching your short-term money needs with short-term investments and your long-term money needs with long-term investments, and again, invest in stocks for the long term.

The next consideration is asset allocation. This involves deciding how much of your money you’ll invest in different asset classes such as stocks, bonds, or real estate. Studies conclude that the specific investment you choose within that asset class does not make as much difference over time as the asset class itself does. What does that mean? Well, it’s not about whether you own Coke or Pepsi; it’s rather about whether you own stocks or bonds.

Asset allocation is a huge factor that will determine your overall investment returns and the growth of your portfolio. It’s important when you’re trying to invest in stocks that you understand this because this is ultimately how you balance your risk and reward.

Next is diversification. Simply stated, this means don’t have all of your eggs in one basket, right? The intended result of diversifying your portfolio is to have a safer and less volatile investment experience. In a diversified portfolio, you’re not going to be hitting home runs, but you also won’t be striking out either.

We know about asset classes like stocks and bonds, but diversification takes it one step further. Investors might consider diversifying across different economic sectors like technology, healthcare, and energy, and even across geographical regions like North America, Europe, and Asia. Spreading your investments across these different sectors and regions helps to mitigate risk by reducing exposure to any single investment.

Now, this next topic can be triggering sometimes, but I want to talk about investing irrationally due to politics. Political cycles are relatively short compared to investment horizons, and market performance has historically been influenced more by long-term economic trends than by specific political administrations or policies.

I work with very conservative clients as well as very liberal clients from all over the country. It’s interesting to watch those whose party is out of power think that the end of the world is imminent. We can’t let our feelings about the current resident of the White House influence our investment decisions. Let me share some examples to illustrate this point.

This is XLE, an exchange-traded fund (ETF) that holds about 25 different oil and gas stocks, representing the petroleum industry as a whole. If I were to ask which president was the most oil and gas-friendly in our history, we would probably think of Donald Trump. Conversely, we might consider President Biden as the most unfriendly toward the petroleum industry.

Under Trump’s presidency, this ETF, which favors the petroleum industry, went down 28%. Under Biden’s presidency, it surged up 141%.

This cuts both ways. Here’s another example: TAN, another ETF, is essentially a solar energy fund with about 50 different stocks associated with solar energy. If I were to ask which president is the most environmentally conscious, you’d probably say President Biden. Well, during Trump’s presidency, this ETF surged 569%. During Biden’s presidency so far, it’s gone down 62%.

Although politicians can temporarily influence the markets, ultimately, it’s the earnings of corporations that drive the price of their stock. It’s the American entrepreneur. So, sometimes I like to bring it home by asking the question:

Who’s had the greatest influence in your own life? Was it the president at the time or the creators of the iPhone, Amazon, or Google—products you use every single day? It can save you a lot of heartache to divorce your stock investments from your politics.

Avoiding Market Timing

I also want to address the importance of avoiding what’s called market timing. Market timing is when someone tries to jump in and out of the market to avoid the bad days and capture the returns of the good days. However, it is impossible to predict when good and bad days will happen.

This chart on the screen shows the potential effect that pulling out of the stock market could have on a portfolio. Let me go through it with you. What we’re saying here is the growth of $10,000 invested in the S&P 500 from 1980 through the end of 2023. If you had put that $10,000 in back in 1980 and left it until the end of 2023, your portfolio would have been valued at a little over $1.3 million.

Now, what happens if you miss the best five days over that 43-year period? You just lost yourself half a million dollars, and now it’s valued at $847,000. What happens if you miss the best 10 days? Now, it’s cut by more than half, down to $610,000. If you miss the best 30 days, the best month of investing, that $10,000 grows to $219,000. If you miss the best 50 days, that $10,000 only grows to $96,088.

Problems with Market Timing

As you can see, an investor does not have to miss many good days to feel the financial impact over time. Market timing allows you to sit on the sidelines and avoid volatility, but it creates several other problems.

Knowing when to get out and when to get back in

First and foremost, it creates the problem of knowing when to get back in. You don’t just have to get lucky once; you have to guess correctly twice—you need to know when to get out and when to get back in. I can tell you, not many people have the ability, when the markets are at all-time lows, to say, “Now is the time I’m going to throw all my money back in.” It’s much easier said than done.

Missing potential rebounds

The second problem is that by going to the sidelines, you could miss the potential rebound. And third, beyond that, you’ll miss the potential rebound and all the compound interest and growth on that money going forward. So staying disciplined and not moving your investments will help you have a more successful approach when investing in the stock market.

Finally, a good plan brings it all together. A smart retirement plan ties in all of the considerations you see here on the screen: longevity, how to accomplish your financial goals, the amount of risk you can tolerate, your overall time horizon, and how to allocate and diversify your portfolio.

At my firm, Peterson Wealth, we use a proprietary process called the Perennial Income Model™ to help our clients create a retirement plan that meets their goals. Without that plan, it would be very difficult to know how to invest for our clients, specifically where stocks fit inside their portfolios. Goals are meaningless without the plans we make to accomplish those goals. Having that plan in place will make your stock investment decisions much easier and give you more peace of mind.

Okay, so just a quick recap here. Longevity and inflation are real challenges that you face as a retiree, and we have to do something about them. Stocks can often provide the higher returns needed to mitigate those challenges. You need to have some stocks in your portfolio. Although there are concerns when investing in the market, thoughtful planning and investing for the long term can create the positive outcomes we’re looking for.

Question & Answer (39:50)

So, I’ve done a lot of talking. I’m going to turn it over to Daniel for a couple of questions here, but before I do that, let me just say first and foremost, thanks again for tuning in and giving this a listen. Another quick plug for the survey that will pop up after the meeting ends—if you wouldn’t mind filling that out, our team would be very appreciative. It gives us some ideas on what you want to hear about next.

Daniel Ruske: there aren’t that many questions right now. I’m sure more will pop in now that we’re at the end. So, please stick around for just a few more minutes so we can get your feedback. Alek, we’ve had some really good questions. I’ve tried to answer them, and there are a few that I think will be beneficial for the group. I’ll start with this one: With money to do so, which is the better choice—one, increase my 401(k) contributions to the maximum amount each year, or two, invest the maximum amount into a Roth IRA each year?

Alek Johnson: That’s a great question. The reality is that I would probably recommend first and foremost you reach out to one of us so we can help you walk through it. It kind of depends on what tax bracket you’re in, at what point in time, and where you think you’ll be in the future.

I say that because if you are making a really high income right now and expect to make less when you retire, it probably makes more sense to increase your contributions to your traditional 401(k) so that you’re not being taxed at the higher rate right now, and when you pull it out of the 401(k), it’s taxed at a lower rate. The same thing applies vice versa. If you think you’re making less now than you will later on in your career, it might be beneficial to prioritize a Roth IRA.

Daniel Ruske: And then I’ll just highlight as well, you can do pre-tax and Roth on both the 401(k) and the IRA side. So that’s more of a tax question, and whether you contribute to one or the other, as long as you have good investments, it shouldn’t make a big difference. Would you agree?

Alek Johnson: Yeah, absolutely. Great point.

Daniel Ruske: Okay, moving down the list here. And they keep popping in, so thanks, guys. If we can’t get to them, please email us. I’m 15 years from retirement. I’ve been told to put all my personal retirement savings in the S&P 500 for the next 10 years and then start to switch to lower-risk investments. What are your thoughts?

Alek Johnson: Yeah, it’s a great question. You can definitely be more diversified than just the S&P 500. It’s a great index, but you can get other stocks in there with it.

As far as right now, I think 15 years out, it’s probably comfortable to have a majority of stocks. Over time, exactly as you’ve been recommended, you’ll want to get more conservative. Typically, we see most retirees have about 60% of their portfolio in stocks and 40% in bonds. If you’re in 100% stocks right now, you’ll likely want to get more conservative as the years go by, moving towards that 60/40 traditional retiree portfolio. Daniel, any follow-up thoughts on that?

Daniel Ruske:  Yeah, well, this is a follow-up question: What are your thoughts on the S&P 500 versus a total stock market mutual fund with a little bit more equity diversity?

Alek Johnson: Yeah, they’re both really good options. For those total stock market funds, you’ll have not only large-cap stocks but also mid-size and small-size stock companies in there as well—still publicly traded. The large-cap portion will still significantly influence the movement and performance of that total stock index, but both can be great, valuable tools to have.

Daniel Ruske: I personally like the diversity of a total market; however, over the last 20 years, it wouldn’t have provided as good a return, but who knows what the future will bring. So, that’s what I’ll add there.

I retire in three years and am planning on working with your group. Do I roll my 401(k) over into the five-year/25-year stock program? When do I do that?

Alek Johnson: Yeah, that’s a great question. As far as the timing of it, oftentimes…We’re in no rush to formalize the official client relationship. We would probably recommend leaving the 401(k) with your employer until you retire. Then, when you retire, we can move that into the Perennial Income Model and start investing in that manner. Sometimes it makes sense to formalize the relationship beforehand. Again, this is more of an individual question, so I would recommend reaching out if you have more specific questions on that. Generally speaking, it’s okay to wait until retirement, but we will want to have at least some conversations beforehand, before you hit your retirement date.

Daniel Ruske: Awesome. I’ll just add that a lot of it depends on your comfort. If you’re comfortable managing it on your own until you want to do the income plan, we’ll let you do that. If you really want someone to take care of it, we’re also happy to talk.

Do you offer a fee-based financial planning option?

Alek Johnson: Great question. Right now, we are fee-only. We have an asset under management fee, meaning Peterson Wealth bills a fee based on what we’re managing. We don’t charge an hourly rate, but we do offer free consultations. That’s how these relationships even start in the first place. So definitely reach out; any of our advisors are more than happy to have a quick 15-20 minute chat with you to steer you in the right direction. Then we can look at formalizing the relationship when you retire.

Daniel Ruske: We don’t have an hourly fee. We just charge an asset under management fee right now. The hourly fee is not an option.

Questions keep coming, so I’m going to do two or three more here if that’s okay, Alek. A question about being almost 80 and how to allocate your investments. Please reach out so we can dive into specifics. It’s hard to give good guidance with just a paragraph question.

How much is the fee that we charge?

Alek Johnson: The fee depends on how much we’re managing. It’s typically around, or just a little over, 1% annually.

Daniel Ruske: I am retired and 76 years old. Do you keep adjusting the stocks and bonds in respect to my age?

Alek Johnson: That’s a great question. A lot of that depends on your goals—whether you’re using it for income, if you’re not using the money, etc. There are many variables, but we’ll definitely be looking to keep you rebalanced with the goals you have.

Daniel Ruske: Let me do one more. My husband has already retired and has his 401(k). I won’t retire for another two years. Should we convert his 401(k) into a Roth now and do mine later?

Alek Johnson: When it comes to Roth conversions, it’s hard to give a clear answer right here. I would say reach out to us on that one. There’s a lot more that goes into it than people often think. Sometimes it makes more sense to not convert. Please reach out to us; we’re happy to chat with you about your specific situation.

Daniel Ruske: Awesome. I think we’ve addressed every question that’s come through. If we missed one or if you want more details, shoot us an email and we can set up a time to talk, as Alek mentioned.

Alek Johnson: Thank you, Daniel, and thank you everyone for your participation. I hope this was informative for you. Please do fill out that survey if you have a moment, and we’ll talk to you again soon.

Risk Management for Retirees

Risk Management for Retirees (0:00)

Scott Peterson: Welcome, everybody. It’s good to have you with us today. For those who don’t know me, my name is Scott Peterson. I’m the managing partner of Peterson Walt Advisors, and again, it’s good to have you with us. We appreciate the time you are willing to spend with us today. This presentation was created to prepare our clients for our upcoming appointments, where we’ll focus on risk management.

I understand we have quite a few non-clients joining us today, and we’re glad to have you with us. We believe that you will also benefit from this webinar. For the non-Peterson Wealth Advisor clients, just so you know, we regularly meet with our clients to review their investments, go over their taxes, and help them apply for Social Security or Medicare. We also work extensively with charitable contributions, ensuring our clients make these contributions in the most tax-beneficial way possible. Additionally, we rotate through a series of topics to make sure our clients are prepared for whatever comes their way.

This quarter, we’ll be focusing on the topic of risk management. We’ll share with you what we have found works for our clients and provide some ideas on how to best protect yourself.

A couple of housekeeping items: the webinar will last about 45 minutes to an hour. We’ll have a Q&A session afterward for any questions you have. If you have specific questions related to your situation, you can wait until your appointment with your advisor. But if you have a question that might be applicable to all participants, please let us know. You can use the Q&A feature in Zoom, and some of us will be monitoring that during the presentation. There will also be a survey at the end of the presentation in your browser.

Let me start with a disclaimer. The attorneys make us say this every time, but I think it’s a good idea. The information provided in this webinar does not and is not intended to constitute legal advice. Instead, all information, content, and materials available are for general informational purposes only. We always say this, but this is why you have advisors. Our greatest fear is that you take one little idea out of context and run with it without having all the information you need. If you have any questions, this is the time to reach out to your advisor.

I’ll start the webinar by talking about investment risk, followed by Carson Johnson, who will cover property and casualty. Josh Glenn will then help us with health insurance-related issues. Alex Call will share with you what we are seeing these days regarding fraud and give you some warnings. Finally, Jeff Lindsay will finish the webinar by discussing end-of-life issues and some of the risks we see for those unprepared for this stage of life.

We will not be going into great depth on any one of these topics but plan on doing that during your upcoming appointments on the topics that are of most interest to you. Clients, as we go through these issues, you may want to take notes so you can thoroughly cover the topics most applicable to your own situation.

Investment Risk (4:04)

With that, let me just jump into investment risks. We are the people who manage your money, so I’m sure you talk a lot to your advisors about investments and risks and concerns. I just wanted to take a couple of minutes today to review investment risks. When it comes to investment risk, I always like to ask the question: what exactly is risk?

What is Investment Risk?

We know all investments have risks, but they have different kinds of risks. You’ve heard of interest rate risk, liquidity risk, market risk, and all sorts of different risks. The key to a successful investment program is to recognize the risks in your own portfolio and then create a portfolio of investments that limits your specific risks.

To answer the question, “What is risk?” I propose that risk is the loss of purchasing power. I will share with you the three biggest investment risks that retirees face every day and give you some ideas on how to reduce those risks or how they are being reduced for you.

When we say risk is the loss of purchasing power, the first risk I’d like to discuss is market risk. Market risk is when you own an investment or share of a business, and the investment or business goes down in value or maybe even goes out of business. For example, if a business you own goes bankrupt, that’s market risk.

Market Risk and Its Impact on Purchasing Power

With market risk, you can lose a lot of purchasing power suddenly and dramatically. Most investors confuse market risk with volatility. To be clear, volatility is not the same as market risk. Volatility is actually unpredictability. Volatility, which has neither positive nor negative connotations, is not the same as risk. Risk is where you could actually lose purchasing power. Volatility refers to the fluctuation of account values.

When it comes to market risk, investors can lose money in several ways. Firstly, by not being sufficiently diversified. We often hear about the importance of not putting all your eggs in one basket. Some people are reluctant to give up their favorite stock or have accumulated a significant amount of stock while working, putting them at greater risk compared to those with a diversified portfolio.

Aligning Investments with Financial Goals

Another way to lose money is by investing in the wrong kinds of things. For instance, having short-term money or money needed in the near future invested in long-term investments is risky. If you are saving to buy a car in a year, it doesn’t make sense to put that money into stocks. While it may work out, there’s a big risk if the markets go down and stay down for two or three years, causing you to lose money when you need to withdraw it.

Sometimes, investors are simply impatient. Markets are cyclical and typically stay down for an average of about a year or two before bouncing back up. However, investors may become impatient or even panicky, thinking it’s different this time and they need to get out.

There are proactive steps we can take to reduce market risk. We can mitigate it through diversification, aligning investments with when they will be needed, and educating ourselves about the volatility and temporary nature of markets. Markets always bounce back.

Moving on to the next risk: inflation risk. We’ve heard a lot about inflation recently. Inflation rates have been higher in the past couple of years, and the Federal Reserve is continually addressing this issue. Some of you might remember in the early eighties when money market rates were very high, but inflation was even higher, which eroded purchasing power.

Historically, inflation has averaged about 3%. At this rate, purchasing power would shrink significantly over a 30-year retirement unless investments keep up with inflation. The key is to ensure investments outpace inflation, even if it means enduring periods of volatility. Purchasing equities or stock-related investments has historically been the way to beat inflation over a long period. However, these investments are more volatile.

Over time, the risk of owning equities decreases. Although there are periods where markets go down, over 20 or 30 years, stocks have consistently outperformed other investments and beaten inflation.

On the other hand, keeping money in lower-yielding, lower-return investments over time increases the risk of inflation eroding purchasing power. The longer you hold such investments without keeping up with inflation, the more dangerous it becomes.

Finding the right balance between equities and lower volatility investments like bank accounts and bonds is crucial. Maintaining this balance with discipline is essential to manage risk effectively and ensure your investments grow over time while mitigating the impact of inflation.

And that is the conundrum, isn’t it? We need a little bit of both to make this whole retirement thing work as it should. It requires a very delicate, carefully crafted portfolio that matches your current investments with your future income needs.

So, bottom line, we need to plan. We need to plan to protect your short-term money and your long-term money. You need a plan that matches your future income with your current investment program.

The Perennial Income Model™ (13:02)

Those of you who have been with us know that we use the Perennial Income Model to manage our clients’ money. We created this model in 2007, and it is a common-sense approach for creating retirement income, matching your current investment portfolio with your future income needs. We find the right balance and help you maintain that balance throughout your retirement.

The portfolios we use within the Perennial Income Model are very well diversified. We talked about market risk earlier; one way to mitigate that is through a diversified portfolio. Most importantly, it matches your short-term needs with short-term investments and your long-term income needs with long-term investments.

Having said that, I’m not going to go into more detail about the Perennial Income Model, as we’ve discussed it extensively, and I believe you understand it well. However, I think one of the biggest risks our investments may face is our own investment behavior.

Investment Behavior as a Risk Factor

During times like these, with political craziness, high inflation, and volatile markets, maintaining investment discipline can be challenging. There are so many distractions, disinformation, and emotions that can cause us to lose focus and make poor decisions. Humans tend to be shortsighted, prone to panic, and biased in ways we may not even realize.

What we have found is that when investors recognize the reason they own specific investments, understand how these investments fit into their overall financial plan, and know when these investments will be needed to provide future income, they become more rational.

We rolled out the Perennial Income Model in 2007, right before the crash of 2008-2009. During the crash, we had about half of our clients in the Perennial Income Model and half who were not. We noticed that those with the Perennial Income Model made better investment decisions and did not panic. They understood what they were holding and why, and knew they had the necessary money for their short-term needs while waiting for the stock market to rebound.

The Perennial Income Model provides a structured approach that helps investors make rational decisions during market downturns. The decision not to sell during a market decline can be one of the most important investment decisions you make for yourself and your family. The Perennial Income Model can make this decision easier.

For those who are not clients and are wondering about the Perennial Income Model, you can learn more about it on our website, petersonwealth.com, where you can also order my book, “Plan on Living.” Clients, if you have questions about how the Perennial Income Model protects your downside and offers protection from investment risk, please ask your advisor. They can provide detailed information specific to your situation.

Thank you, and I’ll now turn the time over to Carson Johnson.

Property & Casualty Insurance (17:45)

Carson Johnson: Thank you, Scott. Let me just get situated here.

Okay, so let’s jump in now and talk about property and casualty insurance as it relates to overall risk management. Property and casualty insurance, also known as P&C insurance, is something many of you probably already have and will likely not need to make major adjustments to, but it is an important aspect of your overall financial plan, especially as you shift into retirement.

Property and casualty insurance helps protect you and your property from damages and losses. At its core, it provides two types of protection:

  1. Property Protection: This covers your home and personal belongings from damages or losses due to unexpected events such as fires, theft, or natural disasters.
  2. Casualty Insurance: This relates to liability protection, covering you when you are responsible for damages to other people’s property or injuries to other people. Examples include someone getting hurt on your property or causing a car accident that damages another vehicle or person.

Often, P&C policies are bundled together, providing protection against both property damage and liability claims. There are various types of P&C policies, including auto insurance, home insurance, and renters insurance. Each type covers specific sets of damages and liabilities.

P&C insurance works like other types of insurance. If your property is damaged or destroyed by a covered incident, you can file a claim with your insurance company to be reimbursed for the losses. The same applies to liability claims. It’s crucial to understand that your coverage is limited by the terms of your policy, making it important to select the right coverage limits and understand your overall policy.

Retirees often ask about umbrella policies because they are intrigued by the additional protection these policies offer. In retirement, individuals often have more assets than ever before and want to ensure these assets are protected. Umbrella coverage provides extra liability protection beyond the limits of your other policies. For instance, if someone gets injured on your property and the medical bills exceed your homeowner’s policy limits, an umbrella policy can cover the excess amount.

A common misconception is that umbrella policies are essential for everyone. However, your existing policies might already provide sufficient coverage. Often, you cannot get an umbrella policy until you increase your liability coverage on your existing policies. The key to determining if an umbrella policy is right for you is understanding your current coverage and assessing any additional exposure you might have.

When purchasing P&C insurance, it’s important to consider both the coverage and the cost. The more coverage you have, the more expensive it will be. Many people don’t fully understand what their property is worth and how much coverage they have. If you have a home worth $500,000, you want a homeowner’s policy that covers your dwelling for that amount.

The deductible is another important factor. This is the amount you are responsible for paying before the insurance company makes any payments. Generally, the lower the deductible, the higher your monthly premium. The goal is to find a deductible you can afford, with money set aside to cover it, without causing a financial burden.

Inflation is another critical consideration. Inflation can erode the value of your insurance over time. As the value of your property and liabilities rises with inflation, if your policy coverage stays the same, your policy may not cover the full value of your losses.

Understanding and maintaining the right P&C coverage is essential for protecting your assets and ensuring your financial stability, especially in retirement. Inflation can significantly impact the value of your insurance over time.

For example, I encountered a prospective client named Susan a few years ago. Susan, a 72-year-old retiree living in California, was caught up in the wildfires that occurred a few years back. She had lived in her home for over 30 years, and due to inflation, the value of her home and rebuilding costs had increased significantly. However, she hadn’t reviewed her P&C coverage in many years and assumed her initial coverage was sufficient.

When the wildfire caused extensive damage to her home, Susan discovered that her insurance coverage was based on her home’s value and rebuilding costs from over a decade ago. The increased costs exceeded her policy coverage limits, leaving her to cover the excess out of pocket. This situation underscores the importance of regularly reviewing your policy to ensure it remains adequate.

Many of you may be aware that some policies include inflation features, which could have solved Susan’s problem. However, the point here is that changes in your stage of life, such as entering retirement or experiencing family changes, may necessitate a review or changes to your policy.

This leads us to the question: why is this important for retirees? Upon retirement, reviewing your property and casualty insurance is crucial for several reasons. Firstly, retirement often brings significant lifestyle changes, such as no longer having children at home, traveling more, or moving to a new state. Moving to a new state could expose you to different risks, such as hurricanes in Florida compared to living in Utah.

Secondly, retirement usually means transitioning to a fixed income, making it important to ensure your coverage is both cost-effective and sufficient to protect against significant financial losses. Without regular reviews, you may find yourself underinsured or paying for unnecessary coverage, depending on changes in your life situation.

Take the time to review your policy and make necessary adjustments to safeguard your assets and ensure peace of mind throughout retirement.

We’ve worked with many retirees over the years, so we put together some questions you should consider asking yourself or your agent:

  • How long has it been since you reviewed your policy?
  • What does your homeowner’s policy currently cover or not cover?
  • Is your liability coverage adequate given the increased costs due to inflation?
  • How can you ensure that it’s both cost-effective and comprehensive?

To help answer these questions, here are three key takeaways:

  1. Assess Your Needs: Take inventory of all the property you own, the value of your home, and understand what coverage you may need.
  2. Seek Professional Advice: While we at Peterson Wealth Advisors are not licensed agents, we can recommend professionals who can help you find the right policy. Be aware that there are captive agents limited to their company’s products and independent agents who can access the entire marketplace.
  3. Understand the Policy Details: Make sure you understand your coverage limits, deductibles, and ensure they align with your unique situation and expectations. The goal is to have the right insurance that aligns with your needs for peace of mind in retirement.

Now, I’ll turn the time over to Josh to talk about health insurance.

Medical Costs (28:58)

Josh Glenn: Thank you, Carson. When you reach retirement, you face greater exposure to medical cost risk. As you can see on the next slide, I refer to this as the “double whammy” of medical costs.

As you all know, medical costs are continuing to rise. You hear it on the news and see it when you visit the doctor. This is the double whammy because, as you get older, you tend to need to go to the doctor more frequently, dealing with expensive medical costs and more frequent visits.

At Peterson Wealth Advisors, we understand this and do three main things to help mitigate medical cost risk:

  1. Education on Health Insurance Options: Transitioning from workforce health insurance coverage to retirement can be confusing. We help you understand your options.
  2. Excellent Tax Planning: For most people in retirement, medical insurance premiums are subsidized by the government. The higher your income, the lower your subsidy. We help with tax planning to keep your taxable income lower and your subsidy higher.
  3. Connecting with Trusted Professionals: While we don’t know all the medical plans, we know people who do. We can connect you with trusted professionals when necessary.

The education piece is crucial, especially with the nuances of health insurance options in retirement. You could be retiring before or after age 65, or you might have one foot in each camp, with a spouse not yet 65 complicating your health insurance needs.

Retiring Before Age 65

There are three main options:

  1. Staying on Your Employer Plan: Sometimes your former employer allows you to stay on their health insurance plan until you turn 65.
  2. Healthcare.gov Plan (Obamacare): This is the most common option for our clients retiring before age 65. More on this later.
  3. Health Insurance Through Mission Service: Many clients who served missions for the Church of Jesus Christ of Latter-Day Saints can get health insurance through the church.

Retiring After Age 65

Things are simpler. You get on Medicare Part A and B, then a Medicare supplement plan or a Medicare Advantage plan to fill in the gaps left by Medicare.

Health Insurance Costs

Retiring before 65, you take on more healthcare cost risk. Obamacare plans tend to be more expensive and offer less coverage than what most are used to. If you want good coverage with low deductibles, you’ll likely pay a lot more than during your working career. These plans are subsidized based on your gross income. For example, a single person making $80,000 a year might pay $540 a month for a mid-tier plan, while someone making $60,000 would pay $400 a month for the same plan.

At Peterson, we work hard to keep your taxable income lower to reduce your medical premiums. Retiring after age 65 is simpler, with Medicare offering much better coverage at a significantly lower cost.

Working with an Agent

While we are experts in financial planning, we don’t know all the medical plan options or your specific medical needs. A licensed insurance agent can help with this. They’ll know the plans in your area, meet with you to understand your medical needs, and give unbiased advice to get you on the right plan.

Understanding and managing health insurance options is crucial for mitigating medical cost risk in retirement. Make sure to seek professional advice and regularly review your policies to ensure they meet your needs.

And one of my favorite things about these agents that we refer our clients to is that you can use them at no cost to you. Whatever plan you sign up for, the insurance company will compensate the agent, so you don’t have to worry about that.

The last thing I want to talk about today is a story from one of our clients. We had a client who had retired and was getting health insurance coverage from their former employer. It was working great for them—low cost, low premium, and great coverage. However, they had a son with different needs, and they were still paying for his insurance. He was also covered by that former employer. The problem was that his portion of the health insurance was not being subsidized by the employer, so they were spending a lot of money each month on his medical insurance.

When we met with them during one of our semi-annual reviews, we asked about their insurance situation, and they explained it to us. Because we are familiar with how Obamacare works, we suggested there might be a better option for them. In this case, their son’s income was lower, so we thought he could get on an Obamacare plan with good coverage at a very affordable cost. We referred them to one of our health insurance agents, and a few weeks later, they emailed us back, very grateful that we took the time to talk about this. They informed us that they would be saving about $14,000 per year on medical insurance.

This is a great story where our clients truly benefited from us addressing their health insurance needs.

That’s all I have for health insurance. I’ll turn the time over to Alex.

Fraud Risks for Retirees (39:30)

Alex Call: Oh, there we go, Josh. Thank you very much for that.

So today, what I’m going to be covering is fraud. When we think of fraud, a lot of times we think of cybersecurity. The reason why this is so applicable for retirees is that often retirees can be more of a target for this type of fraud. That’s what we want to go through today.

There are really two types of fraud that we want to look at. One is tech scams. This involves people accessing your information or tapping into your money through technology. The primary culprit here is usually a fraudulent email or a text message. Text scams have become much more common lately.

The next type is people scams. These involve individuals accessing your information by impersonating somebody else, usually through a phone call. They might say they are from the bank, IRS, Social Security, or even send messages about student loan payments. They can also impersonate someone you trust.

I want to go over some things to be aware of so that you do not fall prey to these scams.

Tech Scams

First, let’s look at tech scams using the acronym SLAM:

  • S is for Sender: When you receive an email, analyze the sender’s email address carefully. Often, you can tell if it’s fake or fraudulent just by looking at it.
  • L is for Links: Hover your mouse over any link in an email to see the actual URL it directs you to. If the URL and the link don’t match up, it’s likely fraudulent.
  • A is for Attachments: Use caution when opening unsolicited or unexpected attachments. Your default should be not to open them unless you are expecting them or you verify from the sender that they are legitimate.
  • M is for Messaging: Watch for misspellings and out-of-character phrasing within the body of an email. With the rise of AI, scammers are getting better at crafting emails, but there are still signs to look for.

Now, let’s look at a couple of examples using SLAM:

Another example shows a fraudulent email where “D” is spelled with a zero instead of an “O.” The message has an urgent tone, saying, “I need your help and I need it now.” These are signs to be cautious about.

People Scams

Next, let’s look at people scams using the acronym PASS:

  • P is for Privacy: Shield your personal data online. Impersonators sound more legitimate if they have information about you, like your birthday, phone number, email address, or home address. If your social media doesn’t need to be public, make it private.
  • A is for Authentic: Ask yourself if the scenario is realistic or too good to be true. Would a family member or friend really request money via email? Would a celebrity contact you for financial support? Think critically about the situation.
  • S is for Source: Verify and check the source before trusting. Make sure the request is legitimate by doing your due diligence.
  • S is for Slow Down: A huge red flag is when impersonators make it sound like a life-or-death situation that needs immediate action. Slow down and think through the request carefully.

The goal for most tech and people scams is ultimately to take your money. More often than not, they will do this by wiring your money to an account. When it comes to wiring money, verify before you trust, as wire fraud is often the end goal.

Fraud Examples

Here are a couple of examples we’ve seen with our clients:

One client had someone impersonating their granddaughter, claiming she needed cash wired to an account because she was stranded in Mexico. The granddaughter conveniently did not want her parents to know about it, asking the client to wire the money directly. Unfortunately, the client sent the money, and once it’s gone through the wire, it’s very difficult, if not almost impossible, to get it back.

Another example is more sophisticated. Someone called pretending to be from the bank’s fraud department, claiming someone inside the bank was accessing the client’s money. They told her not to inform the bank and convinced her to wire tens of thousands of dollars to an outside bank account. This happened over days and weeks. Fortunately, a worker at the receiving bank flagged it, and the client got her money back with our help.

To help you, anytime there’s money being wired to an unfamiliar account, we will always verify and check with you. We also check with the company where the money is being wired. I recommend you do the same: go online, find the phone number of the company you’re wiring money to, and ensure it is legitimate.

Besides being aware and verifying before you trust, the best way to protect yourself online is with account protection. First, protect your accounts, especially your email. Email is the gateway to everything, including your passwords, so it needs to be your most secure account. I’d say your email is more valuable than your social security number in terms of cybersecurity.

Your password should be at least 15 characters long. Think of a movie, game, show, or song—something easy to remember. Length is more important than complexity: think of length as strength.

Another way to protect your accounts is Multi-Factor Authentication (MFA). A great example of MFA is when you pay with your credit card at a gas station, and they ask for your zip code. They’re asking for two ways to authenticate. Set up MFA for your email and other important accounts.

In review, remember these top four things:

  1. SLAM: Sender, Links, Attachments, Messaging
  2. PASS: Privacy, Authenticity, Source, Slow down
  3. Whenever you wire money, verify before you trust.
  4. Protect your accounts with strong passwords (15 characters minimum) and Multi-Factor authentication.

I want to mention a different type of fraud, especially relevant for retirees: family fraud. Working with retirees, we’ve seen everything from helping kids with a down payment on a home to funding their lifestyle. Unfortunately, we’ve also seen outright fraud, with kids taking money from their parents’ accounts, feeling entitled to it as their inheritance.

If you want to give substantial amounts of money to your kids, that’s great. If it aligns with your goals and values, go for it. We can discuss how it affects your plan, your current income, and your future. If there are more serious forms of fraud involving your kids, let us know, and we’ll create a plan to address it.

So working with retirees, we have seen the whole spectrum when it comes to retirees giving money to their kids, whether that’s helping kids with a down payment on their home, funding their kids’ lifestyle, and continuing to send out money all the time to fund it. We have also, unfortunately, seen downright fraud where kids are taking money from their parents’ account, feeling entitled to the money, and justifying it because that’s their inheritance anyway, and they’re going to get that money either way when mom and dad die.

If you want to give substantial amounts of money to your kids, that is great if that’s a goal and a value that you have. We would like to discuss with you how that is going to affect your plan. What does that mean for your income today and moving forward so that you are well aware of what giving large sums of money to your kids looks like? If you think there are more serious forms of fraud with your kids, please let us know, and we’ll figure out a game plan to help get through that.

And now, we’ll turn the time over to Jeff to finish up with end-of-life financial risks.

End-of-Life Financial Risks (54:27)

Jeff Lindsay: Thank you, Alex. And thank you all for sticking with us all the way to the end of this webinar. No pun intended. I’m gonna be speaking on end-of-life financial risks. I know this is a difficult topic for some because we have a hard time facing our own mortality, or it could be a difficult topic because we have to face the mortality of our closest loved ones. There are, however, major financial risks that arise around the end of a retiree’s life, and it’s important to address them.

Risks Associated with End of Life

These are a few of the major risks that we see associated with the end of life.

  • Chronic illness: healthcare was already covered, but often at the end of life, a chronic illness can increase financial strain.
  • Long-term care: if one or both spouses need to spend time in a long-term care facility or bring care into the home, this can be very expensive as well. Often, a stay in a long-term care facility isn’t as long as we might expect. On the other hand, paying for long-term care insurance can also be expensive over time.
  • Cognitive decline: studies show that our mental capacity declines as our memory worsens along with financial decision-making abilities.
  • Death of a spouse: an important question every retiree should consider is, if you are the one who deals with the money in your household, who is going to help your spouse make prudent financial decisions when you pass on? It is a cruel reality that a surviving spouse must make some of the most important financial decisions of their life immediately after the death of their spouse. This is the very moment when they’re least capable of making any decision at all. New widows and widowers are often in shock, dealing with situational depression, and struggling just to get through each day.
  • Inheritance risk: when money passes from one generation to another, some of the greatest financial risks exist without a well-thought-out and executed plan. Money can be wasted, lost, stolen, or taxed into a fraction of the size of that gift you intended to leave your heirs or your spouse. It’s true that you can’t take it with you, but you can arrange things in a way that would provide a meaningful legacy to those you care about.
  • Death. A list of end-of-life risks wouldn’t be complete without death. I suppose, in a sense, the greatest risk we all face and the corresponding life insurance discussion is probably one of the main things you all thought about when you saw this topic today. Don’t worry, I’m not gonna sell you life insurance today. Quite the opposite, actually.

I wanted to go through real quick and discuss a little bit about life insurance. Insurance is a financial instrument used to cover a specific risk. Life insurance is designed to cover the income of the person who has died. If you’re in a place financially where neither spouse needs to work or if you don’t have anybody relying on your income, there may be little or no need for life insurance.

I’ve got the slide up here that you can see how this kind of works over a lifetime, the need for life insurance. But of course, it’s never as easy as illustrated here. Instead, you buy a term policy that gets you close to or into retirement years. At the point when the term is up, you’re faced with the decision to either continue coverage at much higher prices or lower coverage at similar prices, or else drop the coverage and risk missing out on that big lump sum you’ve been looking at all these years.

The Role of Life Insurance at the End of Life

If you’ve been saving along the way and you have a suitable investment portfolio built up to cover your income at the end of your life, and you’re still relatively healthy, this decision may not be that difficult, and it may be just a matter of dropping that policy. Think about it: if you were put into a situation where you didn’t have a car, you wouldn’t any longer need car insurance. So life insurance should be seen the same way. When you no longer need the life insurance to cover the financial risk of your passing, you shouldn’t feel bad letting it drop.

Having said all that, if you already have a policy open and you’re paying on that, I’m not telling you to just bust that policy. Make sure you do some financial analysis on this. It’s worth the time to do that. Don’t just crash your policy before verifying that it’s right for your situation.

I wanted to tell a few stories to illustrate the importance of addressing these end-of-life risks. I’ll try to keep them short as our time is limited.

We’ve heard of people who, when one of their spouses passed away, panicked and sold a motor home worth $100,000 for only $19,000. We’ve heard of people selling cabins and homes just for cash flow when they actually had cash flow but didn’t know how to access it at the time.

I know of a man who had a brilliant and long, successful career. He did well with his investments over time, but as his cognitive abilities declined, he was scammed out of his entire life savings. He now lives on the street or with those who will let him stay. This happened because he thought he was making another great investment decision but couldn’t see it as the scam that it was. He also didn’t rely on the support group he had built over a lifetime. By the time his children and advisors got involved, it was already too late.

We’ve probably all heard of situations where relatives or unscrupulous salespeople took advantage of someone when they weren’t in a good place to make sound financial decisions. In fact, I went to lunch the other day with a group of friends and brought up this topic. Every single one of them had stories to tell that were relevant to this situation.

I’ll tell one more example. I had a client who decided to give her IRA away to her church at the end of her life. She met with the attorney, made the change within her trust, but forgot to talk to us about this change. So we weren’t able to change the beneficiary on the account to this church. This created a significant risk of a taxable transaction before the money could be donated to the church. We were able to work with the custodian and the CPA to make sure this was done right, but it took the better part of a year. This could have been solved with a conversation and one signature before she had died.

Managing Retirement Risks with Professional Guidance

So what is the solution? Here are a few ideas. A well-designed and executed estate plan can help with many of the issues that come up at the end of life. A trust can often help transfer assets in a tax-efficient manner without involving the court system or other prying eyes. A good power of attorney can help protect assets in situations of cognitive decline. Having the proper beneficiary arrangements will ensure your money is going to the people or organizations you intended during your lifetime.

Having the right type and amount of insurance coverage, including Medicare supplements and other insurances, can reduce risk. This is especially true at the end of life. The cost of life insurance goes way up in the latter years, so keeping too much of it for too long can be a major drain on financial resources.

Effective use of the Perennial Income Model can help during end-of-life situations as well. When one passes away, there will certainly be a document or two that has to be signed, but overall, the surviving spouse can continue on with the plan that was set up when both were alive.

Don’t try to do this alone. Part of your plan should be to find trusted advisors who can help you through this time of life. This could be your financial advisor, your attorney, one or more of your children or loved ones, or a combination of these people. Communicating about who will help with which parts of your life is important. So everybody knows what you want and how involved you want them to be when you want them involved.

Having a child or a loved one involved in meetings with your financial advisor can be a good way to keep everybody on the same page. Do this before you experience significant cognitive decline.

Putting a team together and having the proper plan in place can help save significant portions of your money. Most of you on this call have already taken a great step by hiring Peterson Wealth as your financial advisor. Feel free to use us as the quarterback of your team. We want to help you with the many aspects of your financial life during retirement, including risk management.

We’re not going to get into the insurance transaction, but we can help you think about what makes sense in your situation and get you connected with the people you can trust.

We’re happy when our clients invite their children to come in and be a part of the meetings as appropriate. In fact, in many cases, our clients’ children are nearing retirement and need to set up their own retirement plan.

So hopefully after a whole hour of a webinar here talking about the major risks that retirees face, you can see that we’re helping address the most important ones. During your meetings this year, we want to get into any risks you feel are still unaddressed in your situation to help you create a solution. We look forward to those discussions.

I think we’re almost out of time. We were planning on having some questions. Those that have been monitoring questions, do we still have questions outstanding?

Question & Answer (1:04:55)

Carson Johnson: Yeah, let’s take a look.

Jeff Lindsay: I think if we don’t have anything jumping out, we’re already four minutes over, so we can probably just wrap it up as well.

Carson Johnson: Here’s a good one that I liked that I think Alex answered the question. And maybe Scott if you wanna jump in on this too. The question was how do I measure my investment so that I know that I’m sufficiently diversified? At which point are my investments so diversified that I have weakness in my returns?

So I guess the main question is how do you know if you’re sufficiently diversified? And Scott, do you wanna wanna jump in on that?

Scott Peterson: You know, if we just wanna get real technical, we have investment partners that we can throw your investment holdings into the computer program and it’ll spit out to us exactly what your allocation is. And as far as what duplications you have, I think that’s pretty helpful.

But on the other hand, I think we see more often than not, people just duplicating. You know, they’re buying mutual funds from Fidelity, from Vanguard and they think because they have two separate companies they’ve got it covered, they’re well diversified.

When in reality the Fidelity and the Vanguard fund managers are buying the same stocks. And so it’s kind of hard to know exactly. The solution is not buying four different S&P 500 mutual funds.

So I think it’s hard to answer this question without really looking at what you have, but we’d gladly take a look at it and it just takes us a minute to run it through some of our computer programs.

Carson Johnson: Thoughts about target date funds?

Scott Peterson: Target date funds, they have a place. I think if you’re retiring and you have money in the 401k that could work out well. The Perennial Income Model we think does a lot better job than a target date fund.

And so if you’re not a client, and you’re wondering about what the Perennial Income Model is, I think you need to get the book and read it. And then you can compare that to a target date fund and you’ll see that the model that we use has huge advantages over a target date fund.

Josh Glenn: Looks like one just came through Carson, and I can answer it if you’d like. So someone asked, can you go over the Social Security postponement to save on income? So I think that may be referring to one of my slides and the cost of your, if you’re on Obamacare or something like that, or even Medicare for that matter, if your income gets really high, the cost of your medical premiums are gonna go up.

So if you don’t need Social Security because your other sources of income are enough, it likely would make sense to delay your Social Security so that you don’t have more taxable income and so that doesn’t increase your medical premiums.

Scott Peterson: I would to a certain point, let’s just be clear, Josh was exactly right except for after age 70, there’s no benefit for delaying your Social Security benefit.

So some of these questions, I see we have quite a few questions, but a lot of them, it looks like they would take answering on a more specific basis, I mean, answering your specific problem.

So I just recommend maybe at this point we just go ahead and end this. And remember your question, bring it to your appointment to talk to your advisor about that. They can give you the specifics of your own situation.

Carson Johnson: Okay. Thanks everyone.

Scott Peterson: Thanks y’all.

Financial Safety In Retirement: A Cybersecurity Webinar For Seniors

Financial Safety In Retirement – A Cybersecurity Webinar For Seniors: Welcome to the Webinar (0:00)

Alex Call: My name’s Alex. I am a financial advisor here at Peterson Wealth, and this is Tyson.

Tyson Bottorff: I’m Tyson, I’m a technical account manager over at Equinox IT Services. We do the IT support here for Peterson Wealth Advisors and help them when it comes to cybersecurity and any other IT-related needs.

Alex Call: Part of the reason why we wanted to do this presentation on cybersecurity is Tyson has done presentations at our office for our employees here to help make sure that your money is being protected with your accounts, so many cybersecurity-related things. We’ve gained that knowledge here to help protect your money, and so we wanted to make sure that you also had the opportunity to hear how you can protect your information on your end.

That’s what we’re going to go ahead and do, and that’s why I wanted to bring Tyson in here because he knows this stuff like the back of his hand, much better than I ever will. This is what he does for a living, so we’re happy to have you Tyson.

Tyson Bottorff: Thank you. Yeah, I’m happy to be here.

Alex Call: As we get going into this, today there are really two main things that we want to go over today. One is teaching you how to spot scams, how to spot and recognize them. And as you’ll see, there are really two different types of scams out there.

One is going to be tech scams where they use technology to hack your information and to manipulate, and then also people scams.

It’s kind of people scamming on people, and the people ones, these have been around since the beginning of time. So we’ll go through those, through both of those types. And then what we also want to get into is how to protect yourself, specifically your accounts, whether you’re on wifi with software, and then also any payment methods that you have.

Before jumping into it though, we don’t want to scare you with what’s out there and the type of scams that are going on. How I like to think of it is driving a car, there’s an inherent risk of getting in an accident. But just because there’s that risk doesn’t mean you don’t do it. It doesn’t mean that you should be scared of getting into a car. The reason why is because you know if you follow the speed limit, wear your seatbelt, and avoid reckless driving, the chances of you getting hurt drop-down severely to where it’s very, very slim.

And just like driving, there are these inherent risks when using technology and using the internet. But if you follow some of the guidelines that we talk about today, you’re going to be in a position where you’re able to better protect your accounts, and you’ll be more aware. So you’re gonna be much less likely to get hurt.

Business Email Compromise (3:06)

Going into it, when it comes to those tech scams, the main type of tech scam is called Business Email Compromise.

These are scams where hackers are trying to get into your personal email accounts, and they’re trying to pretend to be you on your device so that they can scam your friends, family, or even yourself, into actions that will benefit them. It says Business Email Compromise, that’s the technical term for it, but it really can be used for personal as well.

Tyson Bottorff: Yeah absolutely, bad guys nowadays really try to prey on our trust. And so they want to pretend to be those people, those friends, family members, even coworkers that we trust to try to defraud us, right? They try to get some money because that’s their whole goal.

Alex Call: Really, there are three main types that you go through or part of this business email compromise, what they’re trying to do. One is by spoofing your email accounts and websites using fake email addresses and just having subtle differences between them.

Tyson Bottorff: Really common ones that we see out there is they add an extra ‘S’ or they put a number or change a letter just slightly. So that way, hopefully, we miss it. So we’re looking and we’re seeing, oh, that’s mortgage.com, and they throw a ‘S’ at the end saying mortgages.com, just hoping that we don’t catch that.

Alex Call: Yeah, thank you. The other one’s going to be what we call spear-phishing. These are going to be emails from trusted contacts that might be scams. And so this is where you’re going to get an email that appears to be from someone you trust, a friend, a family member. It’s just important to always double-check directly with that person.

Tyson Bottorff: Yeah, this one, bad guys do a little bit of recon. They really try to target that attack on us so that we’re more likely to trust it.

Alex Call: Then the other one, this is where they’re using software to get into your devices such as your personal emails, and be able to steal data there. This is how they go about doing it and these are the different specific types that they have.

Specific types of Business Email Compromise (5:20)

The first one is, and a lot of these you’ve probably received emails like these in the past where you get a suspicious bill. You receive a random bill and they want you to verify something before paying that bill.

And so this can be very popular, whether it’s with your bank, I know I personally have gotten a bunch from Geek Squad, or a repair subscription saying, hey, you owe us a few hundred dollars, go ahead and give us a call to pay to make that payment.

Tyson Bottorff: The tricky thing is what they like to do is say, hey, call us right now, otherwise, you’re gonna get charged. And then when you call them, let’s say it looks like it’s from Chase Bank or something like that, they’re going to answer the phone pretending to be Chase Bank. So they try really hard to trick you into giving them what they want.

Alex Call: The next one is going to be a friend’s plea for help. It might be an email saying, hey, I’m stuck in, Mexico. I can’t get money. I need to get this X amount of dollars wired to this account so I can come home.

We’ve seen it with one of our clients that the scammers were pretending to be their grandchild, their granddaughter saying, hey, we need to do this. We need to get back, go ahead and wire it to this account, or send a Venmo to this Venmo account. And so that’s another way that they try to get into your accounts and exploit your trust.

So then the last one that we’re going to talk about is these legal threats or appeals. So this might be, again, an email from someone claiming to be a lawyer or a police officer suggesting that you owe money or you’re going to face some type of consequence. So it’s important to not panic but to always double-check their claim.

SLAM method (7:12)

So the next thing is the SLAM method. So we talked about some of the things that they use to get to us, well this is how we can help protect ourselves. And that’s through this, it’s called the SLAM method.

Tyson Bottorff: The greatest part about the SLAM method is it helps us break down those communications that come in and just helps us have a nice and easy acronym to remember how we can break these things down.

So ‘S’, that’s the sender. Let’s look at where this is coming from, whether it be the email address or the phone number, or what have you, and say, hey, does this look right? Does this line up with where it should be coming from?

The ‘L’ is links. You can hover your mouse over links on your computer to check and see where is this actually trying to take me. Five years ago we used to be able to say just don’t click on links and things. But nowadays, links are everywhere. They’re just in every form of communication, and so we can’t really say that anymore.

So instead we say let’s verify this link. If you’re on your mobile device, you can click and hold and it’ll pop up and then you can copy it into like a notepad or into a notes app or something like that. Just to see where this link actually trying to take me.

The attachments, be careful. There are some attachments that if you’re not expecting it there should just be a little flag saying I’m not really expecting this kind of attachment here. This could be fishy.

And then last is the messaging. Bad guys sometimes have broken English or they just don’t really worry about typing things out properly. And so there are misspellings in there, some phrases that don’t make sense. And then also just ask ourselves why would this person be asking me to do things this way. That’s kind of different from how we’ve done things in the past. So just things like that are good things to analyze when it comes to the message itself. It’s also good to look for flags like what are they trying to get me to do, and what are they trying to ask me to share with them. So things like that.

Real-Life Examples of Phishing Attempts

I’d love to kind of go through a couple of examples here. So I actually have a couple of examples of phishing emails and things like that, that we can go through. And so we can go through these and kind of analyze these emails together so you can understand what I’m saying.

So here’s one that at first glance you’re like this totally looks like it’s from Walmart. If we use the SLAM method and look at the sender address, even though it has Walmart in there, it’s not coming from Walmart’s actual website or domain which would be walmart.com. And so that sender, that’s the first thing that we notice. If we keep going and we look at the link, the next thing we notice here is, okay, I’m going to hover over this. Obviously, they’ve got three links in here. They’re really wanting us to click on something in this email, and I hover over that and I see this is trying to take me to a package tracking portal.com. That doesn’t have anything to do with Walmart either. So, these are some of those flags.

If we look at this, there are no attachments, so nothing for us to analyze there. But we do see that there’s some stuff in messages saying we want to confirm this, we want you to do this, instead of saying, here’s the Walmart website, or contact Walmart directly. It’s like, only contact us through these links. And those are some more flags for us to kind of pay attention to.

These next ones, this is a good example of that spam invoice or that fake invoice that we see here. And so this one is from Geek Squad, and you can see when you look at this, it’s saying you’re going to renew today. You’re going to get charged almost $400. Call these numbers so that we can fix this. You’ll notice that those numbers are in red. They’re really trying to get you to call those numbers. If you were to look up Geek Squad’s actual support number, through a separate, I call it going out of band, you’d see a completely different number there. And so those are the ones to call. But if you call that, that’s going to be the bad guy.

This one in the top right is someone pretending to be your boss. So a couple of things to look at here. It’s a Gmail account, obviously, we want to make sure we understand and know what accounts things should be coming from. If it’s your boss, it probably should be coming from your business account and things like that. So these are just a couple more examples.

For this fake invoice scheme, I follow this YouTube channel called Scammer Payback. It’s a really great channel, and they really go out there to try to stop bad guys from scamming people. It’s really great, a lot of the scams that come up are fake invoice scams that are going around.

Alex Call: Yeah, and that’s where I think it’s so important just to, again, remember that SLAM method. So whenever you’re getting an email from someone that you’re not expecting or from someone asking you to do something, just kind of slow down, look at the sender, double check the links, don’t click on them, just hover over them. If there are any attachments, it should be definitely a red flag that something’s going on. And then just really being focused on the messaging and like why are they asking you this? Why are they asking you to do that?

Tyson Bottorff: Does it sound too good to be true? Because it might be too good to be true.

Alex Call: I know for me personally, working in a business being a financial advisor, we have people all the time saying like I came into a like a hundred million dollars that we want you to manage. And that is typically too good to be true. And so it’s just like, okay, probably not real. We’re going to have to pass it along or go ahead and get out of it.

Social Engineering (13:00)

That’s the tech side part of it. Now I want to talk about the people side. This is people scamming people, and that’s what we call Social Engineering. And so really this just involves manipulating individuals through those human interactions, tricking you into giving them security, into giving them information for you. So it’s just people preying on other people.

So here’s a really good video that just kind of walks through how this might happen.

– Start of video –

When you hear the term social engineering, this is the security industry’s way of referring to a con or a scam technique. It’s basically the art of gaining access to buildings, systems, or data by exploiting human psychology rather than breaking in or using technical hacking techniques.

Famous hacker, Kevin Mitnick, helped popularize the term social engineering in the 1990s, although the idea and many of the techniques have been around as long as there have been scam artists.

But how does a social engineer work? Here are some examples. A social engineer might lurk near a secure doorway with several boxes and pretend they can’t reach their access card or key to get in. They’ll ask, can you hold the door for me?

And an unsuspecting office worker will let them in. The worker never realizes they’ve just given a criminal access to their company’s office. On the phone, a social engineer calls employees and pretends to be the IT help desk trying to trick workers into giving them their password.

Social engineering is dangerous to corporate and personal data because once a data thief has gained access, there’s no telling what he’ll do with it.

So how can you avoid becoming a victim of social engineering? First, be aware, awareness of the types of ploys these criminals use is your number one defense. Second, look around, pause, and ask questions before doing anything. If something doesn’t look or sound right, chances are you are being played by a social engineer.

– End of video –

Tyson Bottorff: This video is really great because it talks about a couple of the ploys that they use. In the IT world, we see this type of stuff all the time where people call in pretending to be a patient asking for patient information, just trying to get as much information as they can from the receptionist. We’ve actually seen people call our office pretending to be an administrator saying hey, I really need this password. Can you provide me with this password?

And so if you don’t have the right tools in place, you could potentially put people in in harm’s way. Like this says, it talks about Kevin Mitnick. He wrote a really great book called Ghost in the Wires which talks about his foray into social engineering. Companies would hire him to go in and prove that he could access their data, and they’d be like there’s no way you can get in. And he would show up pretending to be an employee and get immediate access to all their data. This was back in the nineties, but this was still how social engineering kind of came to be.

A lot of employees out there, the big thing to look at is what are they trying to manipulate you with. A lot of times they create this context or pretext to like their phone calls that includes a sense of urgency. It can include just preying on our overall helpfulness. It can even include things like fear, as we talked about, or respect for authority, pretending to be a lawyer or the government, or things like that.

So, these social engineering attacks on employees have been around for a long time, and we’re just starting to see them continue to build and grow out there in the world and not just on the business side. It’s happening all the time in the consumer world as well.

PASS method (17:05)

Alex Call: And that’s where there’s another little acronym that we have for you to help you be aware and to know what are some things that you can do to make sure that you don’t get involved with that.

I’m a big basketball guy, so we have SLAM for the first one, and the next one’s going to be PASS. The first one is privacy. So with social engineering, they might look you up online and get some information that you have online on Facebook, Instagram, and some of these social media accounts, and then try to create a sense of authority that they have by just giving you a little bit of, yeah, I know what your birth date is. And because they have that, then that kind of builds some of that trust.

So that’s where that first one is privacy. Work on shielding your personal online data, and making your social media accounts private to truly try to work on that privacy.

The next is authentic. Are these people authentic, they might be acting as your friend, again, family member, and you just have to think, is this how my friend or family member would act? Or is this scenario realistic? Is it too good to be true? Because usually if it is too good to be true, it probably is. So see how authentic and sincere the request is.

Next, the source, just don’t trust it immediately, verify and check the source. I know when I’ve gotten scammed with phone calls, people pretending to be Social Security, or something like that. There can be, sometimes you can just take the phone number and I’ll even just put it into Google, and there’s usually like a form saying, hey, this is a scam number, this is a number that you shouldn’t have. Or what Tyson was saying, like for Geek Squad, they tell you to call a number. You can say  is this number legit? Or what is the Geek Squad number? So always look for the source.

Tyson Bottorff: Yeah, I always recommend taking that out of your existing band of communication. So if they’re sending you an email saying I want you to do this stuff, take this out of that band, out of that email and look online, or make a phone call, or send a text message separately outside of that chain to your family member or whatnot. So take it out of that existing band to help you authenticate it.

Alex Call: And then the last one, I would say just slow down. These bad guys rely on a sense of urgency to manipulate. And if we just take our time, slow down, and then really think through it and think through the PASS acronym or the SLAM acronym, that’s going to really help make sure that you don’t get caught up in any of these scams.

How to prevent scams (20:04)

So now that we’ve looked at the main types of scams, both on the tech and the personal, what are some proactive things that we can do now to help prevent that?

The first is protecting your account, and I think of specifically your email. I know Tyson you’ve talked a little bit about like the importance of your email account.

Tyson Bottorff: Yeah, absolutely. I think email nowadays, it’s funny because a lot of times people treat their Social Security numbers as the holy grail. It’s like no, that’s mine, nobody else can touch that. And nowadays our passwords and email are starting to become almost as important as those Social Security numbers. Those are the digital keys to our lives. And so we need to treat them with the same amount of care that we treat our Social Security numbers and even our credit card numbers and banking information. Because they have just as much value, if not more, sometimes to the bad guys.

Alex Call: And that’s where passwords are going to be such a big thing. And I know for a while I was always thinking I need to get my passwords really complex with lots of different characters, numbers, capital, and lowercase, and make it this really complex password where that’s really not the case.

Tyson Bottorff:  Yeah, things have changed a little bit over the years. Nowadays with passwords, it’s really about how long that password is, even if it’s just a few words strung together, that is actually more secure nowadays than one that’s shorter and has all this complexity to it.

Alex Call: So when you’re thinking of passwords, length is strength. So if you can get it up to the 12, 13, or even 15 characters, that’s going to be great. That’s where you want to go.

Tyson Bottorff: Yeah, I like to kind of rephrase it in my brain where instead of a password, it’s a passphrase. So I kind of like to take that and say, let’s make a passphrase for this. And that gives me the length that I need to keep my account secure.

Alex Call: And on top of that, because we know that if you’re like anybody, you probably have hundreds of different accounts, and it’s almost impossible to know your passwords or passphrases for each of those if you’re doing something different for each and every one of them. And so there’s probably a lot of people that say, I’m just going to use the same two or three passwords and just rotate those between all of my different accounts.

Well, to help you with that, there are these password managers that allow you to have different passwords for different accounts.

Tyson Bottorff: With password management, anytime we talk about cybersecurity, you’re dealing with this ongoing battle between security and convenience. And so, they often are at odds. It’s like the more secure I am, the less convenience I have.

Password managers are this perfect blend of the two where it helps me remember all of my passwords and even auto-fill them for me at websites while being secure. So it’s that perfect combination of the two.

Alex Call: And we’ll provide you with a sheet of some recommendations on some of these password managers that we think do a really good job. And so that’s the first thing, just securing your accounts with your password.

The next is going to be this Multi-Factor Authentication. And so this is something that is being rolled out more and more. You’ve probably been asked, whether it’s your email or you open up an account, they want to text you a secure six-digit number or something like that.

I think we are already very familiar with multi-factor authentication. Anytime you try to go fill up your gas, that’s what they’re asking. You have your credit card, something you have that you put in, and then they’re asking you something that you know, usually it’s your zip code for it.

Tyson Bottorff: Yeah, MFA (Multi-Factor Authentication) is really great because I like to think of it like this. When you talk about your house and you talk about your front door, your password is kind of like the main lock on your door. Everybody’s got it, it’s there. If we obviously don’t have it, the door kind of swings wide open. But multifactor is like that digital deadbolt, which gives us a little bit extra security and locks that door to our lives, keeping things out.

So yeah, there are three types of authentication. Something that you have, which is typically like your phone or your credit card or something like that. Something you are, which is biometrics, it’s my face, it’s my thumbprint. And then something you know which for most accounts is my password. Or in Alex’s case of gas, it’s I know my pin or my zip code, something like that.

Alex Call: And I know that it can be annoying, the multifactor authentication, I know it is for me and it usually takes maybe a week or two to kind of get into the habit, and then it just becomes normal. Like, okay, yep, this is the way it is. I log into my email and have my phone on me, I gotta click verifying that it’s me or it’s going to send me a code.

But if you can have that multi-factor authentication, that may be the most important thing to protect you or your accounts.

Tyson Bottorff: There’s a stat where multi-factor authentication blocks 99% of password-related attacks. And so that’s why we push it so hard. This really is a good way, probably the best way currently to protect your passwords.

Alex Call: So, that’s with the account protection. Next, we’re going to talk about some of the risks of using public wifi and why that’s not good. I’m going to play this little video.

– Start of video –

We’ve been warned repeatedly that using free public wifi can put our personal information at risk, but facing a choice of using up our data or connecting with free wifi, most of us take the gamble.

So what is the risk? WBZ’s Christina Hager got a lesson from a real-life hacker.

The risk for the public networks is because they’re out there, they’re open, unencrypted, and an attacker can join it just as easily as you can.

And that’s exactly what we did with the help of hacking expert, Steve Walker.

I can see all the different networks out there, all the different clients, and which one I want to look like.

Wicked Free wifi is available here on the Boston Common, and Steve created his own imposter version with a laptop and small device anyone can buy online.

And that didn’t take too long.

No, it didn’t take long at all.

Anyone closer to his signal than the one the city is blasting out will only see the fake Wicked free Wi-Fi option. And if your device connected to the real system in the past, it could even automatically join this rogue Wi-Fi network.

So you just called it the same thing?

Yeah.

Or is there any slight difference?

No.

Well, the name is exactly the same. The login page is different.

And that’s the login page that I gave you

For Steve’s fake wifi, he created these two phishing links to Facebook and Gmail.

I could sign in here and now you know my Facebook password.

That’s right. The password was Hager.

Yeah, C Hager. That’s my name.

Steve sees every letter as I type it.

Could you be a fake business and take someone’s credit card information?

Yep.

And even if you don’t fall for the links, once you’re connected to the imposter wifi, he knows your every online move.

You’re going to Google.

Anything I’m reading, you can see what I’m interested in.

Yep.

This vulnerability can be exposed through any free and open wifi at coffee shops, stores, airports, hotels, and anywhere.

There’s always a risk when you join any type of public wifi.

If you do join, cyber defense expert Peter Tran recommends turning off any file-sharing apps. And for iPhone users, this means airdrop.

And if you’re gonna be on public wifi, make sure you’re not working with sensitive data or things that you normally would not want to just share with everybody.

And before typing in credit card numbers or passwords, look at the address bar and make sure you see this lock, meaning the website is secure. On Steve’s fake Google page, the address bar didn’t even have that lock. And instead of google.com, you only see a series of numbers. That’s a big red flag. All of this adds up to the reason for this advice.

If you don’t have to get on public wifi, don’t do it.

Christina Hager, WBZ News.

– End of video –

Alex Call: I think the takeaway there, just at the very end, if you don’t have to get on public wifi, don’t get on public wifi.

Tyson Bottorff: Yeah, exactly. It’s funny because a lot of people don’t really understand all the inherent risks, and so they just think, oh wow, free wifi, this is great. I can do whatever I need to on here. You know, no risks. Unfortunately because of these bad guys and them wanting to be malicious, there’s always this inherent risk that you have when you join these unsecured networks.

Alex Call: And one thing that is nice though is that as technology has advanced, there’s much less of a need to use public wifi. And so that’s why, as far as recommendations, we would recommend first and foremost, just using your cellular network.

So if you’re on your phone, just don’t jump on the wifi. Most people have unlimited data, you can be on 5G now, which is supposed to be about just as fast as wifi. So that would be kind of very, something easy to do. Just turn your wifi off and use your cellular data.

Tyson Bottorff: Yeah, what you said there’s key. When you aren’t using your wifi, turn it off. Because like we saw there in that video, your wifi, your phone is always broadcasting that signal. So if it ever were to get closer to a bad guy’s network, it would automatically connect to that network. And so if you have it turned off, that risk is removed.

Alex Call: The next one is similar to using your cellular network, but this is, if you need to hop on a laptop, hop on your computer, you can use your hotspot. And all this is, this is just your ability to use your cellular data and connect your computer to it so you can use your computer with your cell data.

Tyson Bottorff: If you’re someone who travels frequently, a lot of times, your phone providers will even have separate devices that you can purchase or add to your account that you can take with you while you travel to kind of give you that cellular data on the go. So even if your phone may not have the greatest signal, these have a little bit better antennas in there, so you can actually get one of those and take it with you as you travel.

Alex Call: And then if you need to use public wifi, the recommendation would be to have a VPN or this Virtual Private Network.

Tyson Bottorff: There’s always going to be those circumstances where it’s like I just don’t have another choice. I really have to get something done, or I need to get on this public wifi. And for those situations, a VPN is key. And what makes it so vital is a VPN basically creates a tunnel so that all of your network traffic goes through this tunnel, rather than going out through the public internet to where bad guys can see it, it kind of shields all that in this tunnel so that way they can’t actually see what you’re doing and where you’re going.

Alex Call: And to do that, you’ll download an app for it, and again, we’ll send out some recommendations of types of VPN apps that you can use, you just click on that and then that will put you into that tunnel or that Virtual Private Network.

Tyson Bottorff: I personally use a personal VPN when I travel in case I have that odd chance where I have to get on that public wifi.

Alex Call: Next, we want to talk about software.

Tyson Bottorff: It’s interesting because nowadays a lot of people hear these terms like updates, firmware, patching, and all of this is kind of related to the same thing. Your phone, your laptop, or any other devices. The manufacturer, whether it be Apple, Samsung, or Google, they’re always kind of testing their devices to look for holes. So they’re like can a bad guy exploit this software or exploit this hardware in any way? And if they find any, they release an update or a patch that fixes that, it patches that hole. And so that’s why it’s extremely important to make sure that your devices and software are always up to date. So that’s why that’s so key.

Alex Call: I know for me, I just thought that Apple would send out all of these updates to my phone just so my phone would slow down if it was old, and I’d have to get a new one. Well, that may be a benefit for Apple for this. It’s actually much more than that. They really are trying to protect you from these holes.

Tyson Bottorff: The other thing we consider is antivirus and anti-malware. So even though some devices come with built-in antivirus and anti-malware, and before you ask, there really is no difference between Android and Apple when it comes to which one is more secure. Neither, they can both be hacked. It used to be in the past there were just fewer Apple users, so Apple had fewer viruses being written for it, but that’s not the case anymore. And so nowadays, it’s important that even though it may come with it, I highly recommend finding a really solid antivirus to install on your device, whether it be a computer, a phone, or a tablet.

Alex Call: Again, we’ll have some recommendations on that for you that we’ll email.

Different payment methods (34:00)

Next are these different payment methods. So I know that most people pay for things with either their debit or credit card, and there are some pros and cons to both. But as far as protection, credit cards have much better fraud protection allowing you to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping.

Debit and Credit Cards

If you use debit cards, it’s much more difficult to get reimbursed, kind of have to go through a whole process. And then they’ll decide whether or not, who is at fault at that point. With credit cards, a lot of times you just give them a call if your card was lost and you see unauthorized charges. Give them a call, they’ll reimburse you, and it’s very simple.

Wire Transfers

The next one, this is where a lot of fraud comes in, is with these wire transfers. And this is where people are trying to, they’re using the tech scams and then also the social engineering of those people scams in order for you to wire money out to their account. This is where you just want to be very careful whenever you are wiring money, and that is making sure that you’re wiring it to the correct account, that you’re calling the person that you’re really verifying and double checking that this is the correct process to wire the money out.

Tyson Bottorff: Yeah, I highly recommend doing that. Whenever you’re dealing with a high volume of wire transfers, do that out-of-band communication. Because sometimes bad guys are really clever trying to be like, well, let me call you to verify. Let me have my accountant call you to verify. And so if you can take it out of band and call the bank directly or call the company directly that you’ve been dealing with, that’s the best way to get those bad guys out of the loop.

Alex Call: You can just go ahead and Google the company that they’re claiming to be, and then just use the number on Google.

Credit Score

Next is going to be your credit score, just protecting your credit. And this is where I would say the easiest is just to do a credit checkup. So you have access to the three different types of credit agencies, and you’re able to look at a free credit report from each one once a year. So you can check your credit three times a year with these credit checkups, one with each agency just to make sure that nothing has happened, nothing is on there that should not be on there.

And then if you want to take it one step further, you can have what’s called this fraud alert. This is where you contact one of the credit agencies and then just ask them to put this fraud alert on there. And that’s just going to make it harder for someone to open a new credit account in your name. If you give it to one credit agency, they’re going to let the other two know. So you don’t have to tell each of them.

The most extreme way of protecting your credit is just to go ahead and freeze your credit. This is where you’re unable to get any line of credit at this point. So if you’re applying for a credit card, a loan, or anything like that, you’re just not able to get it if you freeze your credit.

To do this, you actually need to contact each individual agency. You need to contact each agency individually and set it up with them, so you have to do that three times. And they’re still able to check your credit if like you’re renting an apartment or something like that, but you’re not able to open up a new line of credit at that point.

Top Six Cybersecurity Suggestions for Seniors (37:50)

Lastly, I just want to again, review the top six things to remember from this presentation to help protect yourself.

  1. SLAM. Remember the sender, links, attachments, and messaging.
  2. PASS. Privacy, make sure it’s authentic, know the source, and then just slow down.
  3. Set up MFA or Multi-Factor Authentication on all your important accounts. And most of them will be urging you to do that. Even your Netflix account or your email, definitely your email, make sure you have that multi-factor authentication. The best part about MFA is it’s free. It’s free to set up everywhere. You just have to go into your account and enable it, or a lot of times they’ll prompt you for it, so you just have to follow the prompts, but that’s the best part. t’s a little inconvenient at first, but then you get used to it and it’s just normal at that point.
  4. Keep your software up to date. You get a software update on your phone, just go ahead and update it when you can.
  5. And Try to avoid public wifi as much as possible. When you use your cell phone, turn wifi off when you’re out in public.
  6. Lastly, make sure to monitor your accounts regularly, whether it’s your credit card accounts or your bank accounts. Just monitor them so you can know if anything is going on there.

6 Investment Tax Traps in Retirement

6 Investment Tax Traps in Retirement: Welcome to the Webinar (0:00)

Carson Johnson: Let me start with an introduction and what we’re talking about today and introduce myself and Kaden. So we’re both excited here to talk about the topic today, which is ‘6 Investment Tax Traps in Retirement.

Learn more about our Retirement Planning Services

For those that don’t know me, you haven’t met me yet, my name is Carson Johnson. I’m a Certified Financial Planner™, one of our lead advisors here at Peterson Wealth Advisors.

Also with me today is Kaden, he’s another one of our Certified Financial Planners™ and advisors here, and he’ll be helping monitor the chat and the Q&A. So if you have any questions, feel free to use the chat and Q&A feature. It’s located at the bottom of your Zoom. So if you hover over the bottom, it should give you an option to click to chat or Q&A to be able to ask any questions along the way.

A couple of housekeeping items. First of all, thank you all so much for giving us feedback on the last webinar. Many of you mentioned that we’ve been going over some of the same material over the past few webinars, and I promise that we will be getting a little more detail into specific topics.

You may notice today that there are a couple of topics that may have some overlap from last time, but the main focus of today’s webinars is to focus on the tax traps or common mistakes that we see with investments. And so that’s the focus of today’s webinar.

And so there might be some overlap but there is also some new material that we haven’t gone over yet and I think will be helpful for you all.

We figured today’s presentation will be about 30 minutes with a short Q&A afterward. So if we don’t get to your questions throughout the presentation, we’ll stay after for just a few minutes in case you want to ask your question.

And if it’s something more pertaining to your own unique situation, feel free to set up a consultation that’s completely free. Happy to go over your situation and see how we can help these principles apply to your situation.

So with all that said, oh, and then at the end also, there will be another survey, and thank you for the ideas that you shared with us on future topics. Please send those to us if you want us to talk about any other topics that you’re interested in.

So with that being said, let’s get started.

So here’s a little overview of what we’re covering today.

  • We’ll go over short-term versus long-term capital gains and how you can manage that and the different applications of capital gains.
  • Consequences of ignoring what’s called step up in basis, and I’ll talk about that. But essentially it’s an important principle as it pertains to inheritance.
  • The impact of ignoring Required Minimum Distributions and the importance of having a plan for those.
  • Roth conversions, considerations to think about to avoid converting too much or too little to make sure you’re maximizing the benefit of conversions.
  • And then lastly, common charitable giving mistakes. Maybe not necessarily what the planning strategies are, but common mistakes that we see for those that are charitably inclined in retirement.

Capital Gains: When would they apply to me? (3:13)

So first, let’s talk about capital gains and when they would apply to you as a retiree. So first, what is a capital gain? A capital gain simply put, is when you sell a capital asset or an asset for more than what you originally paid for.

So for example, if you sold an investment property, that’s an example. There are some important and more unique rules when it’s an investment property, things like depreciation, and that makes it has a little more unique nuance to the sales and investment property. But, the sale of investment property does still qualify for capital gains.

Another example is the sale of an investment in a brokerage account. So for example, if you have a non-retirement account, you know, where you either got an inheritance or a sum of money that you decide to invest. And you can invest that in stocks, bonds, mutual funds, ETFs, a variety of different investments. And you sell those investments at a gain or for more than what you paid for, that would be an example of when capital gains would apply.

The other example would be the sale of a business. So oftentimes we run into retirees who are business owners and when they sell their business, some of it will be considered a capital gain because they purchased or put into the business a certain amount. It grew in value, they built up the business, now it’s worth more than what they paid for, and by selling it they also realize capital gains.

And there’s some unique nuances to that as well that we’re not going to be diving in for the webinar today, but it’s important to think through those aspects.

And then lastly, are mutual funds. Now I want to hit on this just a little bit deeper as it pertains to investment accounts and investment portfolios. You know mutual funds, they’re unique because they’re run by a mutual fund manager or somebody that’s in charge of that fund. And that fund will be investing in a variety of investments of stocks, bonds, options, things like that.

And what happens is occasionally if people either need money from their investment, from their mutual fund, they will ask to sell shares of their mutual fund and so the mutual fund manager has to free up some cash in order to get that cash to the investor. And so what happens occasionally is the mutual fund manager will have to sell investments within the mutual fund for a profit or for more than what they paid for. And so when those capital gains occur, the mutual fund manager doesn’t report those capital gains. He shares those or distributes that capital gains to all the investors or anybody that owns shares of that mutual fund.

So it’s important to know that mutual funds are notorious for this, especially at the end of the year, that mutual funds will issue out what’s called short-term capital gains, which we’ll dive into a little bit more detail, but just issue out these capital gains. And even if you don’t sell your shares of your investment, those capital gains may still be distributed to you that you may be required to report on your tax return.

So be cautious of that and how mutual funds can create extra tax consequences to you as an investor.

So now that we’ve gone over kind of a few examples of what is a capital gain, and in certain applications and how they can apply, let’s talk about the two main categories of capital gains, which is short-term and long-term.

Short-Term vs. Long-Term Capital Gains (6:56)

What is a Short-Term Capital Gain?

So simply put, a short-term capital gain is when you purchase an asset and within 12 months you sell it for more than what you paid for it.

What is a Long-Term Capital Gain?

A long-term capital gain is when you purchase an asset and hold it for one year or more and then you sell it.

Rules of Short- and Long-Term Capital Gains

There’s a few important rules on how this works with these categories that you should be aware of.

Both must be Reported on Your Tax Return

First, both short-term and long-term capital gains must be reported on your tax return. Most taxpayers don’t have to worry about figuring out if it’s short-term or long-term because if you have an investment account, for example, you’re just issued a tax form.

Or if you have a CPA, a CPA can help you with that. If it’s more unique for like a business, for example, might be harder to have, you know, there might not be a tax for that unless there’s K-ones and things like that that you could get. But a CPA can help you but for the most part, taxpayers don’t have to worry about it. It’s already taken care of, just have to get the tax form and report it on your tax return.

You Don’t Pay Capital Gains Until You Sell that Investment

Rule number two, capital gains occur in the year that you sell an asset for a profit. So if you buy an investment and you hold it, you don’t have to pay capital gains until you sell that investment. And that occurs in the year that you sell that asset for a profit.

Each Kind of Capital Gain is Taxed Differently

And then third, short-term and long-term capital gains are taxed differently. So this is where we start to dive into the more planning parts of capital gains and we’ll talk about that next on what are the differences in short-term and long-term capital gains.

So, let’s dive in. With short-term capital gains, short-term capital gains are taxed as ordinary income. So in other words, what that means is it simply means that the capital gains are taxed at your tax rate.

So I have listed on the slide the 2023 tax brackets for those that are single filers as well as those married filing jointly, and it shows you the breakdown of the tax bracket.

How are short-term Capital Gains taxed (spreadsheet)

So for those that don’t understand or know how this works, depending on how much your combined income is, determines what tax bracket or tax rate that applies to.

So for example, if you’re combined income for a married filing jointly is between $89,000 and $190,000, that income is taxed at that 22% rate.

And so whatever rate that you’re, whatever your tax rate is depending on your level of income will determine how much your short-term capital gains are taxed at.

Now for many, as it pertains to long-term capital gains, long-term capital gains are taxed at either 0%, 15%, or 20%. And for many investors, those rates are a lot lower than the ordinary income tax rates.

Now, there’s exceptions of course for those that are maybe on the lower end of the income tax brackets, then capital gains could be higher. But for most retirees and taxpayers, they are at lower rates.

How are Capital Gains taxed? (Spreadsheet)

And so you can see with long-term capital gains, how it works is depending on your level of income, also determines your tax rate. So for a single filer who has income of less than $40,400, any capital gains are taxed at 0%. Now it’s important to keep in mind that capital gains adds on top of your other income. So let’s say the single filer has maybe $35,000 of income, but then maybe let’s say $40,000 of capital gains.

That $35,000 and the $40,000 capital gains adds on top of the $35,000 of other income that that filer may have. So really, their total combined income is going to be about $75,000 right? So then that would jump the capital gains tax rate at 15%.

So it’s important to keep in mind that your capital gains add on top of your ordinary income, and depending on your combined income determines what your long-term capital gains are taxed at.

For married filing jointly, for those that have income less than $80,800, capital gains are taxed at 0%. For those of income between $80,801 and $501,600, it’s taxed at 15%. And then those that have income above $501,601 capital gains are taxed at 20%.

So really to summarize it, short-term capital gains are taxed at your tax rate. Long-term capital gains are taxed at either 0%, 15%, or 20% depending on the level of income and what bracket that you are in.

Step Up of Basis – Inheritance (11:50)

Next, let’s talk about the step up in basis. And this particularly pertains to inheritance. We had a lot of questions regarding, you know, inheritance and how to handle inheritance in retirement. And so this was one of the common questions and planning strategies that we wanted to address today and to make sure that you’re using the effective use of the step up in basis.

So to simply explain what step up in basis is, it’s simply a way to adjust what the capital gains taxpayer will owe for selling a particular investment. So it’s very related to the capital gains discussion we just had.

When someone inherits a capital asset, things like stocks, mutual funds, bonds, real estate, investment properties, etc., the IRS will step up the cost basis or what you originally purchased those properties or assets for.

So for me, the purpose of the capital gains tax, the original cost that you had for any given investment is stepped up to the current value of when the asset was inherited. So let me give you an example to help solidify what I mean by that.

Let’s talk about Jack and James. Jack is James’s father and he’s a retiree. He owns Apple stock that he purchased back in 2010 for $20,000. He wants to give those Apple shares to his son James.

And so what he’s decided to do is rather than gifting the shares, he’s just going to sell his shares and give him the cash so that he can be able to do with the cash that he wants.

So Jack purchased the shares for $20,000. The sell price or the current value of those shares is $100,000, and Jack would realize that long-term capital gain of $80,000. And the tax rate on that, assuming a 15% tax capital gains rate on that capital gain, equals $12,000 of taxes that Jack would have to pay by selling Apple shares.

Now, let’s see how a step up in basis will work. So Jack purchased the Apple shares for $20,000. Jack passes away. James inherits the Apple stock at the current value of $100,000. If James decides to sell the Apple stock for $100,000, then James will then owe $0 in capital gains because James inherited that stock, and he received what’s called a step up in basis.

So instead of the $80,000 capital gain that Jack would have done if he sold the shares and just let James inherit that Apple stock, that original cost of $20,000, steps up to the current value of $100,000. So when James sells it, there’s no capital gains. It essentially wipes out the capital gain that the original or deceased owner had to the current market value.

And so it’s so important, this is probably one of the big misconceptions that retirees have and when they’re trying to distribute assets. Sometimes they’ll do that during their life and then they’ll think, hey, I’m just going to sell this and give it to my kids now.

It’s so important that you think about the tax implications when it comes to an inheritance because just this idea of letting your heirs inherit those assets and receiving that step up in basis, could save tens of thousands of dollars, by simply just being mindful and intentional about how you’re heirs receive those assets.

So, it’s such an important concept.

Now I want to just highlight a few takeaways about the step up in basis. Step up a basis can apply to stocks, bonds, mutual funds, real estate, and a lot more. Really, essentially any type of asset, capital asset. There are some exceptions that you have to be cautious of like things like jewelry, collectibles, that have different rules that apply to those.

But for the most part, a lot of the main assets and investment assets like these, a step up in basis does apply.

The step up in basis resets the cost like we’ve talked about. Spouses who inherit property from a deceased spouse may only qualify for half of the step up in basis. So, you know, coming back to you know, Jack and James. Let’s say Jack had a wife, and his wife inherited some of the Apple stock. Instead of receiving the full step up in basis up to $100,000, they may only receive up to $40,000 of that step up in basis which helps reduce the capital gains, but it doesn’t eliminate the capital gains entirely.

Now, there is one exception for this half step up in basis, which is for those that live in community property states. Those are states such as California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you live in any of those states, your surviving spouse may qualify for the full step up in basis. And so just be aware of that when you’re planning how you want to distribute your assets.

And then lastly, just have a plan on how you’re going to distribute your assets. You know estate planning is such an important aspect of a retirement plan. It’s not just about, you know, making sure somebody’s there to handle your estate or to make certain medical decisions. It’s also about how you want your legacy to be passed on to your future heirs.

The Impact of Ignoring Required Minimum Distributions (17:38)

Okay, next let’s talk about the impact of not having a plan for Required Minimum Distributions. Now some of you that are aware of this, Required Minimum Distributions is a law, that for those that have an IRA or 401k, are required to pull out a certain amount of money once you reach a certain age.

And we’ll talk about that in just a moment. Now in some cases, many of you may be living off of your IRA or 401k income and may satisfy that required amount each and every year. And so this may not be as big of an issue for you.

However, I’ve seen time and time again where retirees will have Social Security income, a pension, maybe rental income, or income from a business. And so they may not be pulling out the full amount from their IRA to satisfy the Required Minimum Distribution. What happens is that IRA, your investment account just continues to get bigger and bigger and bigger which creates a bigger Required Minimum Distribution later in retirement.

So I want to go over a few mistakes and things to think about when what happens if you ignore those Required Minimum Distributions.

As a reminder, since the passing of The SECURE Act 2.0 in December last year, one of the biggest changes was the change to the RMD age which will affect nearly every retiree. So the changes that were made is that the RMD will push back starting this year.

And for future years, I made a summary on this slide here of those changes. So for those that were born in 1950 or earlier, your RMD will continue to go on as normal. For those that were born in 1951 to 1959, your Required Minimum Distribution will be age 70, to start age 73. And those that were born in 1960 or later, your Required Minimum Distribution will start at age 75.

Now there are a couple important points to remember and to clarify. Those that are turning 72 in 2023 will not be required to take an RMD until next year. Also starting in 2033, that’s when RMDs will begin at age 75. So that’s why those born in 1960 or later will start at age 75.

So first, let’s look at mistake number one for ignoring RMDs. And first, it’s the penalties involved. So if an IRA account owner fails to withdraw the RMD, they may be subject to a 50% penalty tax. Now with The SECURE Act 2.0, there was also a change to this. So if you fail to pull out the required amount and you realize that and you say, oh I want to go ahead and fix that. And you fix that within that timely matter within two years, the penalty drops to either 25% or even 10% if you do it even sooner than that.

So you can work with the CPA or tax professional to help make sure that it’s reported correctly or corrected. But that’s something that’s so important. Do not miss the Required Minimum Distributions because there’s pretty hefty penalties.

Mistake number two, ignoring the impact of RMDs. So I want to share this PDF with you, let’s see if technology will work for us here. Okay, perfect.

So let’s focus here on this table on the left. What I’ve shown is an example of, let’s say you’re not necessarily needing as much investment income. You’ve got your income taken care of from Social Security, pensions, or other sources. And if you were to just let your IRA retirement account continue to grow, to show you the impact that it will have later on and retirement.

So in this case, if you’re a 60-year-old retiree, you have a million-dollar IRA, or retirement account, and assuming just a 4% growth rate by the time this retiree turns age 73, at Required Minimum Distributions, the RMD will be about $60,769. Pretty crazy how big that RMD can be.

Now I want to point out a couple of other things. If we continue to look at the Required Minimum Distribution, and assuming that we take out the full RMD each year, you’ll notice that the RMD still continues to get bigger.

Right, even though you’re still taking out the $60,000 about each year, you know, it still continues to get bigger. And the reason for that is because, how the IRS calculates your RMD is, it’s based on one how big your account balance is.

And two, if it’s based on your age. And so as you get older and as your account gets bigger, the bigger your RMD will be. And so that you can see how this could be a problem later in retirement, more taxes that you might have to pay, and we’ll talk about some of the strategies to avoid that.

But I want to show you this other chart here, which shows you the tax brackets. But let’s say this retiree has taxable income of about $130,000 from other sources things, like Social Security, pensions, or income from the business, rentals, etc.

By adding this $60,000 worth of RMDs, that ends up bumping this taxpayer from the 22% bracket to the 24% bracket. And so just letting that RMD ride and not having a plan for it could significantly increase the amount of taxes that you pay. And so being mindful how you do that whether it’s through Roth conversions or drawing a little bit each year and then putting that money into, even if you’re not spending it, putting into a non-retirement account to keep it invested, you know are some examples and ways you can manage your RMD.

So, now let’s move on to mistake number three, which is the impact on Medicare premiums. So if you think back on the previous side when I showed you how the RMD can possibly bump you up into a higher tax bracket, there’s also RMDs can also impact the amount of your Medicare premiums.

So the table that you see on the slide shows a summary of how your Medicare premiums are priced at, and they’re based off of your income.

Mistakes on Required Minimum Distributions and how they impact medicare premiums

How this works is Medicare looks at your income two years prior. And if your income falls within one of these categories, it will determine what your monthly premium is. So, for example, let’s say you’re married filing jointly and your combined income, or to be more specific, you’re modified adjusted gross income falls between $194,000 and $246,000. Your Medicare premium will go up to $230.80 per person, plus your Medicare Part D premium, which is your prescription drug coverage, will be an extra $12.20.

So the base Medicare cost is $164.90, but you can see depending on your income, it could increase by the amount of your combined income that you have. So, you know, if you have your income taken care of and all of a sudden you have this big Required Minimum Distribution, not only could it jump you up into a higher tax bracket, but also a higher IRMAA, or higher Medicare premium bracket, which would increase the cost for you on a monthly basis for your Medicare.

And so, such an important thing, you can see that especially if you have a bit, excuse me, let me go back here, a big event. If you’re selling an investment property later down the road or sell the business, this could really increase your Medicare premiums, so important to be aware of that.

Now there are some exceptions to, you know, if you have like a one-time event where if you’re like, I sold this property, or I’m just retiring I’m not going to have the same level of income that I am going to have going forward. There are ways where you can file a form with Medicare and it’s kind of a forgive me this one-time kind of form where you can ask for forgiveness for this one and be granted an exception.

So if you have questions about how to report that form, we can send you an email, send us an email, we can explain that process to you so that you can avoid having higher Medicare premiums going forward if it’s a one-time event. They kind of, IRS bases it off as a lifetime event, lifetime changing event. So, good.

Roth Conversions: Converting too much or too little? (26:31)

Next, let’s move on to Roth conversions. Now in our last webinar, Alek and I talked about what Roth conversions are, but we didn’t dive into great detail on how much Roth conversions you should do and the impact of converting too much or too little.

So I want to focus on that here today. But just really briefly, let me just explain what the Roth conversion is for those that are just new and jumping on to this. A Roth conversion simply means that it allows you to take money from a pre-tax account like an IRA or 401k and convert it to an after-tax account, which is a Roth IRA or Roth 401k.

By doing this Roth conversion, you’re essentially paying taxes on the amount that you’re converting at your current tax rate. And so, the big consideration of when to do a Roth conversion is to ask yourself, when do I want to pay my taxes? Does it make sense to pay taxes today based on current tax rates or will my tax rate be lower in the future? Maybe waiting just to pull that money out of your regular IRA rather than converting and paying taxes on it today.

So, I want to illustrate this by showing you again the tax brackets. So as we saw the impact of the RMDs, the Required Minimum Distributions, and the fact that we are in fairly low, tax rates today, any amount that you choose to convert becomes taxable to you, like I mentioned. And it’s taxed with you in the year that the conversion is performed.

Tax rates associated with different sized RMDs

So it is very uncommon to convert an entire account because what happens if you convert an entire account, especially if it’s a large account, it’ll likely push you up into a higher tax bracket. Every dollar you convert will add to your combined income.

And so if you convert, let’s say a million dollars, or even $600,000, $700,000 of Roth conversions, that will bump you up to the highest tax bracket and you’ll pay close to about 40% in taxes.

Generally, the advice we give to clients 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 tax bracket. So for those that are still wondering if a Roth conversion is right for you, I’ve highlighted kind of the different brackets into groups.

You can see the first tax brackets are at 10% and 12%. And then there’s a pretty big gap or jump to the next tax bracket of 22%. So for those that are maybe a lower income tax situation, doing conversions at the 10% and 12% are at the lowest rates that we’ve had in a very, very long time.

And so doing a Roth conversion may make sense, especially if that Required Minimum Distribution is going to jump you up into a higher tax bracket. So you should definitely consider doing a Roth conversion if you’re in those lower tax brackets.

For those that are the middle-income earners, those that are in the 22% and 24% tax bracket, you can see that there’s a very little difference between the two. And so if your tax rate is going to be the same as it is today versus what it will be in the future, a Roth conversion may not be as convincing from a financial standpoint or mathematically, right?

Because if you’re going to pay the same rate today on the conversion as you will in the future, you might as well just leave it in the IRA.

However, there are some other non-financial aspects that you may still want to do the conversion. Even if the tax rates are going to be the same things like, you know, your heirs. If this money is going to be passed on to your heirs, one of the big changes that happened with The SECURE Act 2.0 is any heirs that receive an IRA may be required to withdraw or distribute all the money in an IRA within a 10-year time period.

And so you can see how that could have a big impact to heirs, your kids or nephews, nieces, the people that will be inheriting your IRAs because that could jump them up into higher tax brackets and essentially lose out the benefit of a Roth conversion.

For those that are in the higher tax brackets, you know the 32%, 35%, 37%, then a Roth conversion may not again be as convincing. That’s where it will be important for higher income earners to focus on pre-tax accounts and contributing to an IRA or 401K because that reduces the amount of taxable income that shows up on your taxes. Doing Qualified Charitable Distributions, which we’ll talk about later, which allows you to pull money out of your accounts tax-free may be more advantageous than a Roth conversion.

So I like to break it up into these different groups to give you an idea of when you might want to consider doing a conversion and also help give you the boundaries of when to know when too much when you do a conversion, is too much or not enough to really get the benefit out of it.

All right, so let’s talk about some other non-financial considerations. First, is where you will live in retirement. So even if you expect your federal tax rate to stay the same for those middle-income earners for example, where your tax rate may be the same. The difference that some states may partially or entirely tax that retirement income as well. And so from a state income tax perspective, and there may be a reason to do some Roth conversions.

If your future state of residence has a higher state income tax than that of your current one, it definitely makes sense to at least convert some of your assets to a Roth IRA before you move in the state that you have. Let’s say your current state doesn’t have state income tax, but you’re moving to a state that does have state income tax. That might make sense to do some conversions there. And as we keep in mind the other factors like Medicare premiums, tax rates, and things like that.

Another consideration is Required Minimum Distributions. We talked about this, if you ignore it and don’t have a plan for it, then that could create a bigger problem later in retirement. So it may make sense to do Roth conversions from now until you’re Required Minimum Distribution age to help reduce the impact that might have later down the road.

Consider tax rates in Medicare premiums. So just like the Required Minimum Distribution, Roth conversions for every dollar you convert, that adds additional income that you have to report. So that may also impact what your Medicare premiums are. So be careful, it’s a common mistake that we see with retirees as they end up, you know, they get carried away and saying, oh I want to convert all my IRAs.

I think that our tax rates are going to go up and although that may be the case, they may not realize the other costs that are going to happen with taxes and Medicare premiums and things like that.

Lastly, is leaving money to others, and I touched about this just a few minutes ago. But if you’re planning to leave a retirement savings to heirs, consider how it may affect their taxes over many generations.

And like I mentioned, where there’s new rules in play with The SECURE Act 2.0, and that they may be required to pull out all that money after 10 years. That could be a great reason especially if you’re in a lower tax rate in retirement to do some Roth conversions so that your heirs can receive more of your inheritance to them, then if they didn’t, if you ignored it.

Common Qualified Charitable Distribution Mistakes (34:29)

So, lastly is common Qualified Charitable Distribution and charitable giving mistakes. So with many retirees, especially those that we work with, are charitably inclined and plan to give in retirement.

A Qualified Charitable Distribution is a provision and tax code that allows you to withdraw money from your IRA tax-free as long as it goes directly to a qualified charity.

There’s huge tax savings that we talked about in the last webinar. If you think about it, you put money into an IRA or 401k and you didn’t have to pay tax on it. You didn’t have to pay tax on the compound interest or growth over maybe 20 or 30 years of your working career.

And then when you do this strategy, allows you to pull money out of that account now tax-free as long as it goes to charity. So you’re essentially getting triple tax savings by doing this strategy. I would recommend any retiree that is inclined to do and have charitable intentions in retirement should consider this. And we’ll talk about some of the rules and mistakes that we see and how to correctly process these in retirement.

So some of the four benefits and how it can benefit you. It can potentially reduce the taxes on your Social Security benefit. It will reduce the overall amount of income that is taxed and that may also impact your Medicare premiums like we talked about.

It’ll enable you to get a tax benefit by making the charitable contribution. And then Qualified Charitable Distributions count towards satisfying the Required Minimum Distributions later down the road.

So here are some important rules to be aware of. They are only available to people older than age 70 and a half. And to give this a little bit more specific, the IRS doesn’t allow you to do it a day earlier. So even if you’re in the same tax year as you’re 70 and a half birthday, if you do a QCD before your 70 and a half birthday exactly, the IRS could come back and say that that is ineligible. So you have to wait till the to the exact day of your 70 and a half birthday.

Second, they are only available from IRA accounts. Withdrawals from 401ks are not eligible for QCDs. So I’ve seen this time and time again as well, retires will try to withdraw money from their 401K. They’ll receive the check or cash and then send the cash directly to the charity. That is not eligible for QCD. And that could, the IRS could come back and deny that.

A QCD must be a direct transfer from an IRA to a qualified charity. And one example that I’ll give you to illustrate this point. I had a client of mine who actually had the ability to get a checkbook for their IRA. It’s pretty common for a lot of the broker-dealers and custodians like Fidelity Investments, Charles Schwab, TD Ameritrade. They typically have that as an option or a feature. And this client of mine was writing checks to the church directly, and so even though he was writing the check and the money was going to the charity. Essentially, that money was coming directly from him, not from the IRA account.

So you have to make sure when you’re working with your custodian, filling out the paperwork, that it is going directly from Charles Schwab or Fidelity Investments, wherever you’re investment accounts are held to the charity. Writing a check from your IRA does not count, is not a Qualified Charitable Distribution.

Then lastly, a QCD does not count as an itemized deduction. This is so important, or let me just reiterate what I kind of first started and explained the QCDs. QCDs simply allows you to pull money out of an IRA tax-free when normally it would have been taxable to you. It’s not a tax deduction, it’s simply not, you know, you’re just avoiding having to pay tax on that money that you pull out.

So a common mistake that we see some people say, you know, I’m going to exclude this from my income. But also, I’m going to count it as an itemized deduction. If you do that, then the IRS could come back and audit you for that and that could be a big mistake there.

So, when it comes to QCDs, one of the most important aspects is making sure you get the reporting right. So I’ve taken a screenshot of a sample tax return which shows you how it should be reported.

So for example, let’s say you’re retiring, you withdrew a total of $40,000 out of your IRA. But only $25,000 of it was a QCD or Qualified Charitable Distribution.

Then what you show on the tax return is you show the full amount, in box 4a, $40,000, but the taxable amount is the difference between the total and the charitable donations that you’ve made. And so that remaining amount, this $15,000, is the only amount that you’re taxed on because the difference was your charitable distributions.

You have to be, this is how you have to do it and actually write it in on your tax return. Some tax software may account for that. But you have to be very careful with tax software that it is reporting correctly. So if you have questions about making sure that it’s processed correctly, I’ve included this link here, and Everett will make sure that when he sends an email tomorrow that this link is included to make sure that you’re reporting it correctly.

Improper Use of a Donor-Advised Fund (40:04)

Okay, lastly I’ll just wrap this up here, is the improper use of a Donor-Advised Fund. So a Donor-Advised Fund simply is a tool and not an investment. It allows you to be able to make a large contribution to a Donor-Advised Fund and to get a tax deduction and then it allows you to distribute that money to your charities over time.

So for example, if you don’t need cash or even better, securities like stocks or bonds or any other type of investment to the Donor-Advised Fund, whatever year you do that you get a tax deduction. And then that money sits in that Donor-Advised Fund until you’re ready to distribute it to the charity.

So, there are some practical applications of how this could work. A Donor-Advised Fund is very helpful when you’re trying to get a larger deduction, warrant deduction for charitable purposes, or tax purposes. And it gives you more flexibility on how you can distribute that to a charity.

A Donor-Advised Fund helps you get a tax deduction when it’s needed most. Especially if you’re selling a business or property and you have a larger-than-normal income year. And then you can create a charitable fund for a legacy for your future family.

The ways that it can turn into improper use for a Donor-Advised Fund is when you decide to invest that money within the Donor-Advised Fund and you invest it improperly. A lot of times Donor-Advised Funds have a select mutual fund that you can invest in, and some people go maybe a little overboard and try to invest it too aggressively. And then if the market drops on any given day the value of that money could go down. So be cautious of what you’re investing in within your Donor-Advised Fund.

If you contribute too much to a Donor-Advised Fund, you may have left over. And especially if you’re eligible for Qualified Charitable Distributions, this may reduce the benefit that you’re getting from QCDs.

Because if you continue to just grant money or gift money to the charity from your Donor-Advised Fund and not take advantage of your Qualified Charitable Distributions, then you may still have big Required Minimum Distributions that you have to deal with.

So be cautious on how much you contribute to a Donor-Advised Fund.

And then lastly, if you’re planning on gifting the entire contribution to the charity, there’s no reason to set up a Donor-Advised Fund. The purpose is to make a large contribution, have that money sit in the account, and gift it over time gradually. But if you’re planning on just gifting the whole amount, you might as well just gift it directly in the same tax year and avoid going through the headache of setting up another account and worrying about how it’s invested.

Key Insights (42:45)

So I know that’s a lot of information. Let me just summarize the main key insights of what we talked about today. So first is capital gains are taxed at different rates and it’s important how you manage those properly and be aware of how long you hold those assets for.

Second, retirees should have a plan that addresses the impact of Required Minimum Distributions.

Third, carefully consider how the step up in basis can reduce the amount of taxes paid from one generation to the next.

Fourth, a Roth conversion strategy should consider all aspects of your retirement plan. It should not just be made in a vacuum. It should be carefully considered.

And then lastly, be wise on how you do your charitable giving strategies. Just those simple mistakes can eliminate the benefits that you get from those strategies.

Question and Answer (43:36)

Thank you all for attending today. I’m sorry I went a little bit over but we will stay on for the next five minutes to answer any questions. I see there’s a few there, and again, feel free to take that survey. Please rate us there and give us some more ideas of what we can talk about in future webinars.

So I’ll turn the time over here to Kaden, and Kaden are there any questions that you thought were great that we can answer with everybody?

Kaden Waters: Yeah, I saved a couple and then it looks like we had one that came in late. We’ll just have you answer a couple of these. The first two were about the Medicare IRMAA that you covered there.

Question: Are Medicare premiums calculated based on both spouses’ incomes or individual?

Carson Johnson: Yeah, great question. It depends on how you file your taxes. But if you’re married filing jointly, for example, the Medicare premiums since you’re filing jointly will impact both spouses. And so, you know, let’s say you jump up into the higher tax bracket, the Medicare bracket. Let’s say instead of $164.90, it jumps you up to $230. Then both of your Medicare premiums will be $230. So yeah, it’s a great question. It will impact both spouses if you’re married filing jointly.

Question: Do Medicare premium prices lock? Or are there price increases?

Carson Johnson: Oh great question. Yeah, so what happens is the IRS always looks at your income from two years prior. So it doesn’t lock it in, so let’s say you had a high-income year two years ago, but then so in 20, let’s say 2021, but then in 2022 your income went back down to normal levels.

Then you’re your Medicare premiums would drop back to the normal levels as you normally had it, so it doesn’t lock you in.

Question: Do you evaluate Roth conversions that are appropriate for an individual?

Carson Johnson: Absolutely, yep, that’s definitely part of our process when we’re working with people. We will look at all those non-financial aspects that I talked about, but also, you know, kind of doing that analysis looking at their last year’s tax return to see what tax bracket they’re in and just talk through that with them. See if it makes sense and if their Required Minimum Distribution will jump them up into higher tax brackets and things like that.

Question: If you do QCDs, will you likely take the standard deduction?

Carson Johnson: Yep, that’s exactly right. So because the IRS allows you to pull that money out tax-free, you can essentially double dip and also count it as an itemized deduction. So yeah, it’s just simply, it’s not a tax deduction. You just don’t get to be taxed on that income that you pull out.

Question: With capital gains, I understand them being capital gains are taxed at a capital gains rate. But the rest of ordinary income without capital gains is still taxed at your ordinary income tax rate without figuring in your capital gains, correct?

Kaden Waters: And yeah, that is right. So it’s just the portion of your capital gains that exceed that threshold will be taxed at the higher capital gain rate.

Carson Johnson: That’s perfect, and then I did see one other one, I’ll just answer this.

Question: Can you roll over 401K into an IRA and then make a QCD from the IRA?

Carson Johnson: The answer is yes. Doing that rollover is not taxable. So that’s a great way to roll it over to the IRA so you can be able to do that strategy.

Well good, well, if you have any other questions, feel free to send me an email or to our firm. Happy again to dive into more of your situation if you have more unique questions to you. But anything pertaining to what we talked about today, happy to help answer those questions for you and hope you find this helpful for you.

Kaden Waters: Yep, have a great rest of your day.

Carson Johnson: Thanks.

How Does Retirement Impact Your Taxes?

How Does Retirement Impact Your Taxes? (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.

Overpayment and Underpayment Consequences

Overpayment Consequences

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.

Tax Withholding

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.

Estimated Payments

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.

Underpayment Consequences

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.

Three Types of Retirement Accounts

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

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.

Tax-Free Accounts

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.

Taxable Accounts

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 your 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 on Retirement Taxes (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.

Retirement and Taxes 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 The SECURE Act 2.0 Impacts Your Retirement

How The SECURE Act 2.0 Impacts Your Retirement

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.

When and How to Use the 529 to Roth IRA Transfer Option

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 in 401k or IRA (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 info@petersonwealth.com. 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.

SECURE Act 2.0 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.

3 Strategies for Retirees to Save Taxes Through Charitable Giving

3 Strategies for Retirees to Save Taxes Through Charitable Giving

Mark Whitaker: Alright, well we’re just about ready to get started here. We’ve got a question for everybody as your joining the meeting here. We’d love to know where you’re joining from. So in the Zoom meeting, if you’re familiar with using the Zoom platform, there is a chat feature. We’d love to hear where you’re from and tuning in from. So if you want to put down your city, or state, or whatever it be. We’d like to see where everybody is joining from.

We got someone here from Provo. We’ve got a local, a local in the audience. Let’s see, we got South Jordan here and Payson. Utah is well represented.

Mark Whitaker: HK, we got one that came in HK, and does that ring a bell to you? Daniel, what is HK?

Daniel Ruske: Hong Kong? I don’t know.

Mark Whitaker: Oh maybe. Maybe I’m looking for a clarification from that one. We got Nevada, Hong Kong, you were right from Hong, Kong, very cool.

So it looks like we essentially have Utah, Nevada, and Hong Kong here. Here we got southern California. Okay, alright very fun. Well, welcome everyone. I think we’ll go ahead and get started for those of you who signed up for the webinar. You probably noticed there was a different face initially on the webinar invite. Carson Johnson, he was going to present today, but unfortunately, he woke up this morning and was feeling awful. And so he asked that we get someone to fill in. So Daniel, one of our senior lead financial advisors, will be joining me today to cover the part of the presentation that Carson won’t be able to cover today.

For those of you who are unfamiliar with Peterson Wealth Advisors, we specialize in providing retirement planning services – financial planning, investment management, and tax planning – for people who are about to retire, or who are already in retirement. As it might indicate from today’s topic, taxes used for retirees are a very important issue to get right. And so we’re excited to do this webinar.

A little bit about Daniel Ruske, he’s one of our lead financial advisors. He has both a Bachelors’s and a Master’s degree in personal financial planning. He’s also a Certified Financial Planner™ professional, and he’s been with the firm for a number of years. Before joining the firm he worked for another financial planning company here in Utah.

A couple of housekeeping items, for those of you who’ve been on our webinars in the past, this will be very familiar. But we have a couple of things to note. Today’s presentation will be about 20 minutes. We want to cover these topics fairly quickly. So we’re not going to go into a lot of detail, but we like to hit the high-level topics and allow for more time at the end for questions and answers. As you’re listening to the presentation today, as you listen to the webinar, Alek Johnson another one of our financial advisors, he’s also a Certified Financial Planner, he will be monitoring the chat line and the Q&A box.

While we’re going through the presentation, if there’s a question that comes up, you don’t have to wait till the end to type it in. Go ahead and type it in and he’ll be able to answer some of those questions during the presentation. And at the end of the webinar, I think we’ll choose a few of them that will be helpful that would be good to cover for everybody attending today. So please use that feature.

Inevitably, as we talk about taxes, as we talk about these topics there are always going to be things that we can’t cover in detail. So if there’s something that wasn’t addressed clearly, or you’d like to follow up with us to get some questions answered, you can reach out to our firm afterwards, and I think Alek, he’s going to go ahead and put in a link within the chat box. So if you’d like to just schedule a time to meet with one of our Certified Financial Planners to ask some specific questions or to go over something in more detail, please take advantage of that. Or if later on, if you just have a question and you just would like a one-off, you’re not necessarily interested in having a dialogue, but maybe just have a single question, please feel free to reach out to our firm through phone or email and we’d be happy to help you out.

A couple of other housekeeping items. Let’s see, at the end of today’s presentation, we’re also going to have a survey. We appreciate your feedback and every time that you answer those we always look at them. And hopefully, we can make these presentations better and more helpful for everybody.

With that all being said, Daniel, do you think I missed anything that maybe we need to cover for housekeeping items?

Daniel Ruske: Alek covered the question that came through the chat. The recording will be sent out to everybody who’s registered. So if you’re not able to attend the whole time or if you want to go back and watch another part again, you’re able to do that. We normally get that email out the following day.

Mark Whitaker: Oh wonderful, thank you Daniel. That’s perfect. So let’s go over to our outline for today’s presentation. We’re going to go over a quick tax refresher before you jump in, and we learn about strategies and talk about how to apply them for retirees.

A brief review of some core principles of the tax code I think are important. So we’ll do that and then we’re going to get right into the strategy that we talked about. Different ways of doing charitable giving to maximize tax benefits for retirees.

So we’ll talk about bunching. We’re gonna talk about donating appreciated assets. We’re also going to talk about using a Donor Advised Fund and making Qualified Charitable Distributions. Like I said, at the end we’ll make time to have a Question and Answer portion.

So with that all being said, let’s jump into, let’s call it Tax 101.

Tax 101 (5:50)

Now I’ve used the analogy, maybe a bit well-worn, but I think it serves its purpose. When you play a board game, and I’ll use the example of monopoly. You have specific rules. And if you want to win, you want to do well in the game, you got to understand what those rules are. And if you don’t understand the rules then you know you’re going to have trouble developing a strategy to have the most advantage.

And as far as taxes go, it’s the same thing. There are rules, and the rules for taxes change from year to year. And so it’s important to work with somebody who can help you understand what those rules are. But there are some general concepts with taxes that basically stay the same from year to year. So that’s what we’ll cover today.

So, with taxes, the individual income tax formula is the basic kind of order of operations for calculating how much taxes somebody has to pay. So for everyone, we start with income.

There’s a lot of different types of income and each one of those different types of income might be taxed at different rates, or there might be a different percentage applied to those kinds or to the different sources of income. Well, when you have income come in, you’re able to exclude some of that income from taxes. So, you don’t even have to count it as income. Those are called above-the-line deductions, or exclusions. These are things that you’re probably familiar with like making a contribution to a Health Saving Account or making a contribution to your 401k or IRA account.

When you make those contributions, you’re making them from income. And that kind of contribution excludes that dollar amount from income. That’s how we arrive at something called your AGI, or Adjusted Gross Income, and this is an important number.

The Significance of AGI

This line right here, your AGI, you’ve probably heard about that because this is the line in the tax code that many of the tax credits and different rates are applicable to. So how much you pay for your Medicare Part B premium in retirement is based off what your AGI is. Whether or not you qualify for certain retirement tax credits in your state or at the federal level is contingent on your Adjusted Gross Income. So this is a very important number, and anything that we can do to manage this number for taxes is very important.

Well, from there, everybody gets to take some additional deductions. You’ve likely heard of something called the standard deduction and something called itemized deductions. A standard deduction is a particular number based on your filing status, whether you’re filing as an individual, or whether you’re filing as a couple married filing jointly.

For example, those are the two most common filing statuses. This is a deduction that you’re able to take. In addition to that you can also, or I should say, kind of alongside that, there are certain things that qualify for tax deductions. And if you add up all of those other deductions and it’s greater than your standard deduction, then you get to deduct the itemized deductions. But if it’s not, you just take the standard.

So fairly familiar ideas. Once you’ve taken off your standard or itemized deduction, that’s how you get to your taxable income there. That’s where you calculate based on your rates, you’re able to deduct credits. And that’s how you know how much of a refund or how much taxes you have too.

Okay, everyone is entitled to tax deductions. And as a quick refresher, these numbers here, these are the numbers for, I’ll pull up my little laser pointer, for the different filing statuses for single and married filing jointly. Now one thing for retirees after you’ve reached age 65, if you’re taking the standard deduction, you get to add an extra deduction to your standard deduction. So, if you’re married, each person gets to add $1,400 to the standard deduction. That’s $1,400 per person. Or if you’re a single filer, you get to add $1,750 and additional deductions.

Okay, a quick refresher. Because of tax law changes that happened back in 2018, most people who file their taxes are just going to take a standard deduction and that’s remained the case for the last several years. So, the question is, with the new tax law, I should say the tax law that was implemented then, how can retirees still get a tax benefit from making charitable contributions?

So that’s what we’ll get in now. So, Daniel do you want to cover today, do you want to cover our first strategy?

Tax Strategy #1: Maximize your Deductions by “Bunching” (10:41)

Daniel Ruske: Yeah, absolutely. So, the first strategy is bunching. Now, as Mark mentioned with the change to the increase in the standard deduction, a lot of taxpayers really take the standard. And what this means is they don’t really get tax benefit for the charitable donations that they make.

What is Bunching?

And so, the first strategy we’re going to talk about today is bunching. Now, what bunching is, it’s basically lumping multiple years of donations into the same year for the purpose of trying to get above that standard deduction and get a charitable tax credit for your donations. Now, I want to introduce to you the most famous bunch family I know, and this is the Brady Bunch.

Now, as we go through the Brady’s tax situation, theirs might seem pretty similar to some of you. So, Mike and Carol, they kept a detailed record. And this is what they’ve had for their itemized deductions for the year. And keep in mind that these deductions, the goal is to get it higher than the standard so that we can take the higher of the two.

Bunching Tax Example

So, for these two, they have the property and state income tax of $6,000. They have mortgage interest of $4,000, and then they have their charitable donations that they’ve made in 2022 of $12,000. If we add up all those itemized deductions together, it’s $22,000. And we cross that to the standard deduction and we’re obviously going to take what’s higher. It would be better for them to take the standard deduction.

Now, as you can see in this scenario, let’s go back just for a quick second Mark, the $12,000 that they donated, they could have 0 on that line and their taxes would be the exact same. So, they’re getting no credit for that $12,000 donation.

Now the next scenario that we’re going to talk about is the same, everything is exactly the same. Except for this time, they donate 2022 and 2023’s charity in the same year. The same property in state income tax is $6,000. The same mortgage interest is $4,000. But this time you can see on the line there, 2022 and 2023 donations are paid to total $24,000. In this case, we add up the itemized deductions, a total of $34,000. We cross that to the standard deduction. The Brady family this year, they’re going to take the itemized deduction, which is higher.

Now the plan when you do a bunch like this, a 2-year bunching strategy would be every other year in 2022. You itemized by donating 2-years’ worth of charity. The next year you’ve already paid the charity at the prior year, so you’ll take the standard and as a result, this gives you an average deduction of $29,400. In this scenario, obviously, your numbers will be a little different. But in this scenario, it results in a yearly savings of $828 each year.

Now, let’s cross that to 3-year bunching. So, in this scenario, the plan would be to donate 2022, 23, and 24’s charity all in the same year. You know we have the same property and state income tax, the same mortgage interest. But this time, the charitable donations are $36,000, 3 years’ worth of donations. As we add all those itemized deductions together, we get $46,000. It’s obviously much greater than the standard deduction.

The Brady’s will take the $46,000 as the deduction for their 2022 income on their income tax return, and then you can see in this plan you would donate 3 years, get the deduction. Then the next 2 years you would take the standard, and then in that, in that fourth year, you would determine if it makes sense to bunch again. And by doing a 3-year, bunching strategy you can see that Mike and Carol are saving approximately $1,272 each year.

More on Bunching Tax

Now a few things to highlight about bunching is, you know, you have to have the money to pay upfront right? And you have to kind of give this lump sum, you know, either 2- or 3-years’ worth of donations in the same year. And so, keep that in mind when applying the strategy. And then the other thing to consider is maybe you have this money, you’re ready to donate, and you know you’re going to donate it, but maybe you don’t really want the charity to get it all at once. Or maybe you don’t know you know, for sure, what your charitable desires will be in the future. Are you able to get a donation this year, and then divvy it out later on?

And the answer is yes. And so the answer to do this would be a Donor Advised fund. Now a Donor Advised Fund, is abbreviated DAF or DAF. So if we say DAF, we’re referring to this Donor Advised fund. And really, I think it should be called a Donor Advised account. I think it just makes it easier to understand because this fund is actually an account that an individual can, or a joint couple or family can establish. Really it’s an account, a personal charity account for you.

And as you can see on the screen if you follow the arrows, the advantage is you can donate cash, or appreciated stock donations and kind to this account. Now you get the tax deduction the year you donate it to this account. However, this account is something that you and your family can manage and really divvy out to the end charity in any amount that you want and really at any rate that you want.

So this account works really well if you’re bunching and you want to, you know, maybe you have a grandson, or daughter going on a mission next year. And you want to help with their mission, but you want the donation this year.

DAF

Well, you could donate to a Donor Advised Fund, have it sit in this DAF account until the need arises for a charity. And then from the DAF, you transfer to the end charity. And I will note that if you donate to a DAF, all of the funds in that account, or that Donor Advised Fund must go to a charity. There’s no way to get it back. So as long as it goes to a qualified charity, this can be for you know, really any of the donations, to the Church, it can be to any qualified charity that you could think of that you might donate to.

Very good. And then, the last thing I want to, well I’ll go through these points really quick and just read them. The reason why a DAF might work for you is with a DAF bunching of donations it becomes much easier to do and charitable giving becomes much more flexible.

A DAF also helps the donor to get tax deduction when it’s needed the most. And I want to talk a little bit more on this point here. You know, a DAF is common, we use it with our clients. Let’s say they sell a property, or they sell a business, or they get some type of payout the year that they retire. The advantage to do a bunching strategy or utilizing a DAF in a year when you have higher income is it makes the tax benefit even greater. So let’s run through a scenario real quick.

Husband and wife, they sell a property. They have much higher income than they normally do because of the sale of this property. They also have some extra cash that they could donate so they take the proceeds from the cell of this property. They donate 2- or 3 years’ worth of donations into a Donor Advised Fund. They get the deduction the year that they have the high income. And then they have this account that they can use for charity, really for the remainder of their lives. And I’ll add one more thing here, is, let’s say you have funds remaining in a DAF when you pass away. You can designate an end charity as the beneficiary of that account. Or you can name one of your family members to continue to manage that account on your behalf even after you passed away.

So, if you’ve donated to a DAF, and you haven’t used all of those funds, you could name your son or daughter and they can continue to use that for charity purposes as the family sees fit. So, it really is a great tool and that goes to point number 3, it creates a charitable fund for future generations there.

Tax Strategy #2: Donating Appreciated Assets to Charity (19:26)

Very good. Strategy number 2, Donating Appreciated Assets to charity. Now, this idea has been used in the past. We’ve heard of donating eggs and milk and wheat to charities. And rather than donating just cash or money right? And the item, that I’m going to bring up today is donating apples. And you may not donate an apple from a tree, but you donate apple stock. So the donating of appreciated assets. What this is, is let’s say, you bought apple stock and the stock has grown inside of this. And the shares they are embedded gains that if you sold to cash, you would have to realize the long-term capital gain that you’ve had on this apple stock.

Donate Directly to Charity

Now, what if you donate it directly to a charity? Well, what happens is you don’t have to realize that capital gain, and the charity also doesn’t have to realize that capital gain. And so, I have here on the screen on the left-hand side, we have a situation where we have appreciated apple stock. On the left-hand side, we have the $25,000. We sell it to cash and then we donate the cash. What happens in this scenario is, we have to pay $5,000 worth of State and Federal tax to give us a net of $20,000, which we then can donate to our charity.

Now, on the right-hand side, what if we just donated the apple stock directly to our charity? Well, you can see instead of paying $5,000 to State Federal tax, you pay nothing. And I’ll note that the charity also doesn’t have to pay this. What happens here is the charity gets an additional $5,000 and the donor doesn’t have to pay the tax on the gain. The donor also gets to deduct the full $25,000, versus just the $20,000 net after taxes. And then the last thing here is you can use the cash, say the $5,000 savings to reinvest, in you know, let’s say apple stock again, or another stock. And a few years down the road after it’s grown and has this appreciated value to it, you can then do the same strategy again. You could donate the appreciated stock.

So we have clients that you know, they donate let’s say $10,000 per year. And rather than donating cash, they donate $10,000 worth of stock. And then with that $10,000 that they’re taking from their wages, or from you know their Social Security or so forth. They then just reinvest that cash back into stocks. And then we kind of have this always maturing or always ready to donate appreciated stocks, and it works out to be a great strategy there. The last thing I’ll mention.

Mark Whitaker: Daniel, I was going to, Dan sorry to interject I was going to ask you. So, what we’ve talked about donating stocks that have gone up in value. Are there other or what are some of the other types of investments or in-kind donations that a person could make?

Daniel Ruske: Yeah, so perfect question. So, there are ways you can donate, say a part of a business. There are ways you can donate part of a property too.

So, let’s say you have an appreciated business, that the basis in it that it’s growing a lot larger. There are ways to donate this to avoid the capital gain on selling this. You know in this case, it’s not a stock but a property or business to then defer, or not defer, but don’t donate that, those gains and save those taxes. And then Mark maybe you have more you want to add to that question.

Mark Whitaker: Yeah, I was, I would maybe just to put a bow on it. I think you put it really well Daniel. Maybe the one last little thing that I’ll add is to say that when you donate appreciated investments that have gone up in value. A good way I like to think about it is you’re getting to double dip with your tax benefit.

Like Daniel said you’re able to, number one, you don’t have to pay the capital gains tax on the growth that you had in the investment. So now all of a sudden, you’ve avoided a certain amount of additional income. So that’s the first tax benefit. And the second is you now have the ability to donate a larger dollar amount potentially and increase, you know, the ads to your itemized deduction. So, this is a great strategy that’s known. But it’s also overlooked enough that we wanted to make sure it was included for today’s presentation, a very powerful tool for really for anybody, but especially for retirees.

Daniel Ruske: Excellent, I’d just add one more thing, Mark. A lot of charities have a donation and kind department. So, if you have questions about a particular charity, and if you can donate stock, or appreciated asset of any kind, you know we’re happy to do some research for you and contact that department. But a lot of those have it. And I saw a question pop up.

Can you donate stock to a DAF or does it have to go directly to the charity? Yes, you can donate appreciated assets to a Donor Advised Fund. So that could work.

Mark Whitaker: So, you know into your last point Daniel. I’ll just say this last one thing before we move on. To your last point, about not knowing whether the charity that you want to donate to, whether or not they have the ability, you know the team to be able to accept appreciated investments, you know except stocks and that sort of thing. And this is one of the other benefits of using a Donor Advised Fund, is that you know using a Donor Advised Fund, we like to use the one that’s done through Fidelity, Fidelity Charitable. But there’s a lot of other ones that are excellent.

These larger financial institutions have the legal and accounting teams and just the infrastructure to allow you to make donations of appreciated assets. And then from there you know, you can send a check to you know the food pantry or you know, what other maybe local charity that doesn’t have, maybe doesn’t have the bandwidth because they’re a smaller organization. You can just send them cash and make it so it can facilitate donating to the people that you want to.

Tax Strategy #3: Qualified Charitable Distribution (26:04)

Okay, so the last strategy that I’m going to, that we’ll talk about today is something called a Qualified Charitable Distribution, a QCD.

And up to this point, all of the strategies that we’ve discussed have related to trying to maximize your itemized deduction. So instead of taking the standard deduction, what if we donated multiple years of donations to be able to bunch and get a higher itemized in a particular year. And then on average, you know, we’ll have higher deductions. Or what if we donate shares of stock you know this way, we’re able to increase that itemized deduction. All of those deductions, or all of those donations, are coming from non-retirement accounts. And when I say non-retirement, what I’m referring to is you know, like a brokerage account, or a bank account.

Now, with this third strategy, Qualified Charitable Distributions. This is a little bit, different. This is a charitable giving strategy that is only available through a particular type of retirement account, an IRA. Nothing fancy, many of you have heard of it. It’s like a 401k account. Not through a company, just on your own. And this giving strategy is also only available to folks, who are over age 70 and a half. Now when you make a donation from a retirement account it also creates a deduction on a different part of the tax code. A deduction here actually reduces your AGI, your adjusted gross income. So it can have some additional tax benefits that the other strategies we discussed can’t do. So that’s what we’ll get into.

How does it work, and what is it? So like I said, a Qualified Charitable Distribution is a donation made from a retirement account, from an IRA. And when you do this, you’re taking money directly out of your IRA and setting it to a qualified public charity.

Now the benefit to doing that is you don’t have to recognize that the money you’re taking out, you don’t have to recognize that this is income. And for those of you who are getting closer to 70 and a half, or are already there, or may have just heard of this, once you reach age 72 in the United States, you actually are forced to take out a percentage of your retirement account each year. Whether you want to or not. Whether you need the income or not.

And so now all of a sudden, you’re going to be forced at 70 to take money out. This is a method of getting money out of your retirement account without having to pay taxes. So what are some of the benefits of doing a Qualified Charitable Distribution?

Well first of all, because you’re taking out, you’re taking it out tax-free, you don’t have to pay taxes on that distribution which you normally would have to. The other benefit is that because you’re reducing, because of the tax code, the amount of taxes you pay on Social Security could potentially be lower by making a donation this way versus other ways.

And a couple of, and then I guess maybe just to reiterate a point that we’ve already made, is that because of the higher standard deduction like Daniel illustrated, many people who pay to share, who make donations to charities don’t receive although it’s important to them. They don’t actually receive a tax benefit because their total itemized productions are rarely, you know, rarely exceeding their standard deduction.

How QCD Works

So let’s talk about maybe how, let’s look at kind of a, let’s get an example of how this works. So I have a retiree. Her name is Lori, and Lori is interested in doing a Qualified Charitable Distribution, a QCD. So we can see here on the left-hand side, these are her sources of income. She has Social Security, she has a pension, and every single year, at 72 now, she has to take out $10,500 from her IRA account. Now you can see that below that, we have her itemized deductions.

She could either do an itemized or standard. Well, she has her State and local taxes. And then she is going to plan on making about $7,000 worth of charitable contributions. So actually looking at her itemized deduction, $15,000, it is higher than the standard deduction. So she says, great I’m going to itemize. And with that, she has a total tax bill of $5,471. Now FYI, we have people tuning in from not just the United States, but other countries as well as every state. The numbers I’m using for this are for U.S. federal income tax and income tax for the State of Utah. I say that because every state has a different way. Some have an income tax, some don’t. They’re all different so just a little disclaimer here.

Okay, so with this she says well what if instead of doing an itemized deduction for the $7,000, what if I did a QCD? Well, let’s look at what that would do. First of all, we have the same income sources, pension, Social Security. I’d like to highlight one thing here on this page. You can see here that next to Social Security. In the first example, of the $35,000 she received, $16,400 was taxable. Well now, in the second scenario, only $10,450 from Social Security is taxable. Now, why is that? It’s the same Social Security.

The reason is because now that she doesn’t have to claim this $10,500, that full amount is income because she’s going to take out 7,000 and send that directly to a charity. It has an additional tax benefit in that she doesn’t have to claim as much of her Social Security as taxable income. That was a lot, maybe a little too wordy, the way that I put that. But the bottom line is that by doing a donation this way, you can potentially save additional taxes by lowering the amount of your Social Security benefit that is even subject to taxes.

So, let’s look at the numbers. Well, for itemized, she just has her state and local taxes. No charitable because she took it here. She can’t double-claim it. And so now she’s going to take her standard deduction. And you can see here that are total state and federal tax income taxes for the year are $3,108. So the bottom line is, she’s going to save almost $2,400 in taxes. Not by donating extra, but just by changing the method, the way she donates.

QCD Example

Okay, next example. We’ve got Jim and Lisa, and we have their income sources here. Pension, Social Security, and they’ve saved up a lot of retirement savings. So their required distribution is $60,000 for the year. Okay, we look at their state and local taxes and they’re going to donate about $25,000 to charity this year. Well, they’re going to take the itemized deduction. Often we have people ask us, “Well I already itemized because of how much I donate so this isn’t relevant for me.” Well, it may. Sometimes it’s not, but often it is.

So you can see that they’re going to take the itemized deduction and they have a total tax bill of just over $18,000 between state and federal. So, let’s look at what would happen if they did a QCD instead.

Well, here you can see that they’re taking out instead of $60,000, $25,000 of that is going to go directly to their charities. Instead of taking an itemized deduction, we’ll take a standard deduction. And you can see their total tax bill here is about $13,460. So again, even for somebody who was itemized, by changing the method by which they donate, they’re saving over $5,200 in taxes. By donating extra, doing anything special, except for this one thing, which is changing the method of donation. Doing a QCD versus itemizing it.

What to Know about QCDs

Okay, a couple of things to know with QCDs. It’s almost always beneficial to do it, not always, but almost always. And really to answer this question, we just need to run two scenarios, look at it both ways, and see if it makes sense. And to answer the question, yes, it does satisfy your required distribution. I was going to go into detail here about how to report a QCD. This is really the realm of your CPA, and this is something that’s a lot more well-known now. So I won’t do any details here, but obviously, you can ask more about that later.

You have to be 70 and a half to do a QCD. It has to come out of an IRA and you can’t do it from a 401k. Unfortunately, that’s part of the rule. So you have to do a rollover from your 401k to an IRA. And then from there, you can do QCDs. The donation has to go directly to a charity, and if you were curious, there is an upper limit where you can’t donate more than a $100,000 in a particular year.

So we’ve got some lessons I guess to pull from this. Getting to know your numbers. We need to base our decisions on real information. It’s hard to do planning unless you know the rules right? And taxes matter. By implementing these strategies, this is a way that you can have more money for your standard of living.  Inflation is relevant, so the more that you can keep for yourself, rather than paying in taxes, is going to help with that. And you’re going to be able to support causes more efficiently that are important to you.

So with that being said, I think we’ve covered everything that we want to. We’ll go into our question-and-answer section now. And so, if you have a question, go ahead and put it into the Q&A box, and Alek I’ll turn the time over to you. Any questions that have come in that maybe we can get started with?

Tax Question and Answer (35:49)

Alek Johnson: Yeah, perfect. We’ve actually had a lot of really great questions. So, the first one here is just, I’ve kind of partially answered, but if you do want to speak more to it.

If you own a home. Isn’t it always better to itemize deductions?

Mark Whitaker: Yeah, great question. Daniel, do you want to jump on that?

Daniel Ruske: Yeah, great question. So, if you own a home, is it always better to itemize? My initial thought would be no. Now there’s an advantage to having mortgage interest because that goes to your itemized deductions. And then maybe helps get you closer to getting your charitable donations to help you on your tax credit. But I wouldn’t always say no. I would say you really have to take it case by case. Mortgage interest can help you on your taxes, but then you are paying interest to the bank. And so really, we’d have to dive into the situation to determine what’s the tax savings versus what interest you’re paying to the bank to figure out, okay does it make sense to itemize, or to just look into something else.

You have anything more to add there Mark?

Mark Whitaker: I know, I think that’s great. I was going to say just by way of example with many of our clients. I would say that most of our clients, they’re retired, or they’re about to retire, and they have their homes paid off. And those that don’t have their homes paid off have fixed-rate mortgages with very small mortgages. And so that being the case, most of our clients are taking standard deductions most years, even though they own homes. And that’s not because you know some philosophical, bent towards yes we have to take a standard deduction.

Like Daniel said, we just have to look at the numbers and what actually makes sense on a case-by-case basis. So yeah, just because you own a home doesn’t necessarily mean as a retiree that you will itemize. So a great question.

And given the time here, Alek, maybe we can do maybe one or two more good questions. And then I’ll say if with the questions that have come in, if you didn’t get your question answered, or you have other questions like I said you can reach out to our company directly and we’ll be happy to answer more questions for you. But any others there Alek?

Alek Johnson: Yeah, perfect. So one more that might be worthwhile for the general public here.

When donating appreciated assets to receive the tax deduction, do your deductions have to exceed the standard deduction to make it beneficial?

I kind of partially answered that there’s kind of two portions here of the tax benefits between the appreciated assets themselves, and then getting above that standard deduction if you want to talk about that.

Mark Whitaker: Oh, I love that Alek. Yeah, you really hit the nail on the head. So to answer the question, when you’re donating appreciated assets, does it have to be greater than the standard deduction to even make it work?

Like Alek said, there’s two 2 components that you might remember I said. Appreciated assets is like double dipping. So the first benefit is that by donating the appreciated asset, let’s say you were going to donate $10,000 to charity anyway. So you could do it with appreciation stock or with cash. Well, the benefit of just doing the stock is that in order to, you know by donating that, you no longer have to recognize the capital gains tax embedded in that stock. So you’re getting a tax benefit right off the bat by donating this stock instead of using cash.

So that’s the first thing, and that is a relevant tax benefit whether or not you itemize. Now to the second part of the question, does it have to be greater than the standard deduction to be valuable? Well, the larger it is the better it is. However, it’s possible that let’s say you have higher medical expenses, or you have some mortgage interest, or you have your state and local income tax. If you add up all of those maybe all of that together is $20,000. Well, then to exceed the standard deduction, maybe you only need 5 or $6,000, or 7, 8 right? And so it really depends on your other itemized deductions. So anyway, I hope that’s helpful, gives a little insight into how to think about that.

Daniel Ruske: I, love it Mark. Yeah, you described it very well.

Mark Whitaker: Maybe one more question Alek, and then we’ll let everybody get back to work.

Alek Johnson: Perfect, so one last question here then. So the last question, if I already am itemizing, does it still make sense to do a QCD from the IRA?

Mark Whitaker: Yeah, excellent question. Daniel, any thoughts on that? We covered this in the presentation, but maybe any additional thoughts?

Daniel Ruske: Yeah, so the answer is, we’d have to look at the numbers. And Mark did when he talked about the QCD. He mentioned that in almost every case, the QCD is the better option. But we’d have to look at the numbers. And this is one of those cases where it’s close.

I’ve ran it for clients before that itemized no matter, and really, it turns out to be in my experience, either the same or better to do a QCD. Now, a lot of times it’s the same or better because of the state tax. So depending on what state you’re from we’d have to determine, okay, are you getting savings on the state side even though the federal might be exactly the same. And so it doesn’t make sense. The answer is it could, and I think it’s definitely worth looking at.

Mark Whitaker: Yeah Daniel, I’ll just add one extra thing that we didn’t cover that Daniel didn’t mention, or what, like you said, we have to just look at it. And usually, it’s the state taxes that can like tip the scales one way or another.

One other thing, since we’re talking about retirees is that when you’re retired, you’re taking Social Security. You pay a Medicare Part B premium and believe it or not, the amount that you pay for that Medicare Part B premium is actually based off of your adjusted gross income. I’m sitting here kind of pausing because there are some little nuances. It’s not exactly your AGI, but it’s close to your AGI. So one of the potential benefits of doing a QCD versus itemizing, even if it would be the same either way, is that it’s possible that by doing a QCD, it lowers your AGI and thus allows you to pay a lower premium on your Medicare Part B premium. You know a lower cost for your Medicare Part B.

So, for example, for 2022, the Medicare Part B premium is $170.10 for the lowest income bracket. But it could go as high as $578 per person for Medicare Part B. So anyway, that’s another reason why doing a QCD may be more beneficial than doing an itemized deduction. Because it could reduce how much you pay for Medicare Part B.

So as you might be able to tell, all of these things are interrelated. And maybe you never thought that your health insurance would be related to your taxes, to your charity, to your retirement. But actually, all of these things impact each other. So it’s important, just like before you crack open a new board game, it’s important to read the rules before you put together a good strategy. Before you even can put together a strategy with your retirement income plan, taxes, health care considerations, your income, and your investments. It all ties together. So, it’s important to know the rules and see how you can find advantages and savings by looking at all of these things together as opposed to just one at a time.

I think that’s all we have for today. Again, thank you everyone. There will be a recording that you can pass on or watch this again, and hope everyone has a great day. Merry Christmas, and hope to see you again soon.

Health Insurance Options for the Early Retiree

Health Insurance Options for the Early Retiree

Alek Johnson: Well good afternoon and welcome everyone. Thank you for joining us today. We are very excited to be here with you to talk about the Marketplace insurance.

For those of you who don’t know me, my name is Alek Johnson. I am a Certified Financial Planner™ and one of the lead advisors here at Peterson Wealth Advisors.

And then here with me today is also Chris Cutler one of our trusted health insurance agents.

Chris Cutler: Thanks for having me Alek. Happy to be here.

Alek Johnson: Yeah, thanks Chris.

So today’s webinar is, we’re planning on just being nice and short. We’re going to shoot for 20 to 30 minutes here. Now before we get started, I do have a couple of housekeeping items I just want to go through real quick.

First of all, if you have any questions throughout our webinar, please feel free to use the Q&A feature located at the bottom of the screen on your Zoom.

My colleague Daniel Ruske, he’s one of the Certified Financial Planners and lead advisors here as well. He’s going to be responding to your questions as best he can, and then Chris and I will actually take probably three to five minutes at the end of the webinar to answer any general questions you have.

With that being said, if you have a more individualized question that might require a little more analysis, please feel free to reach out to Chris or myself after the webinar, or reach out to our team and we’re happy to schedule a free consultation with you.

Last thing here is that at the end of the webinar, we will also have a survey that will be available just to give us any feedback, make any suggestions again for future webinar ideas. So if you have, you know, three to five minutes after this, any feedback you have would be extremely helpful for us.

So that being said, let’s dive on in here. So here’s a quick agenda of what we want to go over with you today. Now one point of clarification I just want to make here. Back in July, I wrote an article that briefly discussed some other insurance options before age 65. And these are going to be such things as Cobra, the Christian Healthcare Ministries, Medicaid, and a couple others. We will not be diving into those insurance options today. So if you have any questions again regarding those different options, please feel free to reach out and we’d be happy to discuss those with you in a more personalized setting. But today’s webinar is going to focus solely on the Marketplace insurance.

So that being said, today I’ll start off by just giving us a broad overview of what the Marketplace is, how the Marketplace insurance works, and then Chris is going to give a summary of the companies and just the plans that are available to you. And then again, I’ll just wrap up quickly by discussing how the Marketplace insurance can fit into your overall financial plan.

Overview of the Marketplace (2:47)

So what is the Marketplace? In March of 2010 the Affordable Care Act, which is sometimes known as Obamacare, was passed with the goal of just making insurance more affordable for individuals and families. Now the law provides these individuals and families with government subsidies, otherwise known as premium tax credits, that help lower the monthly premiums for households.

The federal government actually operates the Health Insurance Marketplace, or the Marketplace for short, which is just an online service that helps you enroll for the health insurance. And this is always accessible just at healthcare.gov.

How the Marketplace Insurance Works (3:27)

Now how it works, during enrollment you are going to, you or your health insurance agent I should add, will fill out an application. That’s just going to have some of your basic personal information on there.

Now included with this application, you are going to give them the best estimate of what your income will be for the coming year. Now as just a little side note here, the Marketplace uses your modified Adjusted Gross Income to define what your income is for the future year.

Now I just want to reiterate, and please note this, that the Marketplace does not use your previous year’s income. So this is a very important distinction for retirees who may be coming off a year of really high earnings before they retire. So they’re going to be using your future income.

Determining Your Subsidy Amount

Now based off of what you are projecting your income to be, will determine the amount of subsidy that you are going to qualify for. Now it’s worth a quick note here to discuss pre-COVID versus post-COVID rules.

So before COVID, how the subsidy worked was if your income was between 100% and 400% of the federal poverty line, then you qualified for a subsidy. Now as a reference for a retired couple, so just a household of two, in the year 2022, 400% of the federal poverty level for a retired couple is about $73,000.

Now the catch here as you can kind of see in this depiction was if you made even just one dollar beyond that 400% level then you lost that subsidy completely. It was just a straight drop, a straight cliff with about a 300-foot drop-off.

However, as part of the American Rescue Plan Act, the subsidies were extended to those with income beyond the 400% poverty level. And so from 2021 through 2025, that was just extended recently to get another three years on there.

Higher-income earners can still qualify for that subsidy. So you can see in this depiction here on this post-COVID, it’s just a lot more gradual of a decline instead of that hard cliff. So the higher earners again can qualify for a subsidy.

Reconciling Income Differences at Tax Time

Now one common question we always get is, well what happens if your income doesn’t end up being exactly what you projected it to be? Which if you can get your income to the dollar, I will be completely impressed.

The answer is that you will reconcile any differences when you file your taxes. So to give you an example here, if your income was less than what you projected it to be, you’re going to actually receive a credit on your taxes because you should have been qualifying for more of a subsidy.

Again, vice versa if your income was more than what you projected, then you’re going to have to pay some of that subsidy back when you file your taxes.

So I’m going to turn the time over to Chris to just talk about some of the companies and plan options that are available to you.

Companies and Plan Options Available to You (6:30)

Chris Cutler: Perfect, thanks Alek. So if you’re coming from a company-sponsored health insurance plan, there may be some differences going into the marketplace and looking at your options.

So it is important to consider a lot of different things when you’re trying to find a health plan that’s a good fit for you.

So if you look at this kind of left-hand column there, those are all the companies currently represented on the Marketplace.

And each company has, you know, different doctors and hospital networks to choose from. And even inside each health insurance company, they have different networks to choose from.

So it can get a little bit confusing and it’s important to kind of take your time. Make sure your doctors, prescriptions, and all your needs are met when you’re sifting through these different plans.

And that’s kind of where I can come in and help you out individually if you would like to make sure to find a health plan that’s kind of tailored to your needs.

There are no PPO options on the Marketplace. Meaning when you pick a company or a network, you need to stay within that within that network unless it’s an emergency.

Open enrollment, I want to mention open enrollment, that’s currently going on right now. It started November 1st and goes through January 15th. Open enrollments a great time to just reevaluate health insurance needs for the upcoming year. During that time, you can enroll and you can change plans or make any updates as needed.

Open enrollment is not the only time you can enroll into a health insurance plan. If you retire early and it’s in the middle of the year where your benefits end, you’ll get a 60-day window from the day you lost coverage to enroll into one of these plans through the Marketplace.

Just to kind of wrap your head around, and what you’re looking at as far as options, I wanted to highlight maybe a couple scenarios that I come across. If you just hit that next slide for me Alek that’d be awesome.

Perfect. So this may not be your exact situation. And again, I’m happy to run through your specific situation, but this is an example of a household size of two within Adjusted Gross Income of right around $100,000.

And as you can see, I picked through a few these bronze plans. The premiums are not too bad if that adjusted gross is going to be around that $100,000 mark per year. They start out, you know, right around $215, and then they go up from there.

There’s a lot more plans than this. I just wanted to grab a few of them, just so you can, just see you can see what options are and maybe you can kind of glance at these a little bit. Most of these come with, yeah, they’re going to cover your needs. And again, these plans might not be specifically what you’re looking for but should give you an idea.

If you could go to the next one Alek, that’d be awesome. Perfect, so this situation is just a household of one.

And I did an income estimate of like $20,000. I run across a scenario quite often where someone has a health insurance plan in place for their family. And then they moved to the Marketplace and they have like a 24-year-old child, maybe working part-time, going to school that was on their health insurance plan. And now they have to figure something out.

Well, this is a really good option because if that child isn’t working full-time making maybe around $20,000 a year, you can get a great insurance plan for them for next to nothing. As you can tell, it’s $9 a month. And we know in today’s world you can’t even buy a burrito for that cost. So it’s a pretty good option for a lot of people if it’s a good fit. So, again, I just wanted to reiterate that I am happy to kind of sit down with you or take a phone call and go over your unique needs and see if something like this would help. Go ahead Alek.

Daniel Ruske: And then Chris, just a quick question came up. If you go back to the last slide. What is the AD mean?

Chris Cutler: Yeah, that’s an abbreviation for After Deductible. So some of these plans won’t cover things until the deductible is met. Others will cover, you know hospital, doctor visits, specialist, or primary care visits before the deductible. It’ll just be a small co-pay.

Daniel Ruske: That’s perfect. Thank you.

Alek Johnson: And then Chris, one more question that I saw I just want to clarify right now since I think it’s a good time. The companies on here, someone just asked, are these only Utah companies? Are there more companies outside of Utah? If you want to just speak to that.

Chris Cutler: Yeah. That’s an awesome question. So these companies that are listed here in that left-hand column are the only companies represented in Utah on the Marketplace.

Now, if you live somewhere else full-time, then the Marketplace will have different companies for that state, or they have their own Marketplace platform to choose a plan.

But you know, kind of like I alluded to earlier, it’s hard to, if you have multiple addresses, it’s hard to find a plan that’s going to work across multiple states. Unless it’s like an emergency situation then you can use it anywhere in the world.

Alek Johnson: Right, thank you Chris so much for showing us that. I hope that provided some value to you to be able to see some of the numbers there. One thing I do want to highlight as well that maybe Chris is being bashful on.

It is actually no cost to you to use a health insurance agent. And so whether you do it yourself or whether you use a licensed professional, they will be compensated directly by the insurance company. And so if this is unfamiliar territory for you, please feel free to use a trusted health insurance agent that can help navigate those waters for you.

How the Marketplace Insurance can fit into your Financial Plan (13:46)

Perfect, so to wrap up I just briefly want to take a moment and explain just how the Marketplace insurance can fit into a financial plan. Healthcare is just such an important aspect of any financial plan that having a good understanding of it is absolutely critical.

Now the Marketplace is obviously a great option up until Medicare kicks in at age 65. But again, it’s important to be able to have a clear understanding of what your estimated income is going to be.

Again, because these subsidies are dependent upon your best guess of your income, having a sound financial plan in place, especially for retirees to know an idea of what your income will be, is extremely important so that you don’t have any tax surprises when you file your taxes.

Another important aspect of the Marketplace that I just want to highlight real quickly is that there may be ways, so we’ll have clients ask us, okay, I want a higher subsidy, but I don’t want to interrupt my cash flow.

And so there are definitely ways that we can report a lower modified Adjusted Gross Income while not affecting the desired cash flow that you have for retirement. Now this type of careful planning can again only be achieved by having a retirement income plan in place.

If that is something that you are interested, again we would love to sit down and discuss and see if that strategy makes sense in your situation.

Retirement Health Coverage Question and Answer (15:20)

So we’re going to turn the time to Daniel to ask us a couple of questions here. But before I do that, again I just want to thank you all for attending today. I hope you got something out of this.

Again, please feel free to reach out to Chris if you have any questions regarding getting on the Marketplace insurance or myself and more on the lines of if you have any questions regarding your financial plan and how this can be applied to it.

But we’re going to just open it up for three to five minutes here for some questions and then we’ll jump off. So Daniel any questions?

Daniel Ruske: Yeah, there’s been some awesome questions coming through the chat box here. I’ve tried to answer them, but there are a few I think that would be beneficial for you to answer for everyone.

Now I got a question here that says, the one time I looked online, I was basically bombarded with phone calls from insurance agents that continued for weeks. How do you start looking at these plans without putting all your information and getting bombarded with people trying to close business?

Chris Cutler: Want me to tackle that?

Alek Johnson: Yeah, go ahead.

Chris Cutler: Yeah, good question. And I’m not sure the exact platform that you’re putting your information on, but I will say I have a link that I can send out and I give you my word that I won’t bug you too much unless you want to approach me and have questions.

But I have a link that you’re able to put in your information and view the plans. And I believe if you go to the healthcare.gov site directly, there is a spot on the website where it will allow you to preview plans for 2023. And it does not require you to put in your email or phone number or anything like that. So you should be able to see the plans on that website without that type of hassle.

Daniel Ruske: Yeah, I can confirm that. I actually do that all the time for clients. You can go in there and instead of putting in your information, you just click a little lower down, it says view plans.

So thank you Chris. I got a couple other here, Chris do you offer, or let me just read the question exactly.

Does Chris offer to discuss options with us extended to those outside of Utah? Is he able to speak to options for those who live in other states?

Chris Cutler: I appreciate that. I’m happy to give any type of, I’m happy to talk through situations. But because I’m only licensed in Utah, I am limited as to what I can help out with. I would not be able to help someone enroll outside of Utah and I am not as familiar with the plans outside of Utah.

But if we’re looking for just general questions things like that about the Marketplace, I’m happy to try to help out where I can.

Daniel Ruske: Awesome, and we’ll do one last one here. What if I don’t know my income, what it will be throughout the year or if it’s variable?

Alek Johnson: Yeah, maybe I can start off on that one, and then Chris if you have any follow-up. So the best, obviously we want to get it as close as possible for obvious reasons, right. We want to try to just pinpoint it.

But if you can’t, anytime throughout the year, you can actually go back onto your application and adjust what it’s going to be. So let’s say you projected it was going to be $75,000, and then let’s just say you got a huge bonus at work, it bumped it up to $100,000. You can go back in and change that and that’ll adjust the subsidy that you are receiving throughout the rest of the year as well. Chris, any other thoughts on that?

Chris Cutler: Yeah, and I think you nailed it. Yeah, if you have some big income swings throughout the year, you can always adjust that. It’s important to keep in mind as well that like Alek mentioned, if you keep it as is you may need to pay some of this, the tax credit back when you file taxes if the actual reported income is higher than what the amount was estimated on the application.

Daniel Ruske: Awesome. Can I do one more Alek? I know we want to hurry and get to the survey. There’s a survey at the end that we’d appreciate all of your feedback. But if we can do one more.

Is it possible to modify a Marketplace plan/coverage if a child leaves for college or a mission or if you need to change it throughout the year? Can you change the plan?

Alek Johnson: Yeah, great question. Chris, you want to tackle that?

Chris Cutler: Yeah, I’ll go for that one. So just to clarify, and the question it was asking if you have a plan in place, the Marketplace, and then you have someone move out of the household and go to another state. You just want to change plans and make accommodations for your child that’s moving. Is that, am I getting that correct?

Alek Johnson: I think so yeah.

Chris Cutler: Okay, so in that situation, a move out of state does give you a special enrollment period. So it would probably make the most sense in that situation for that child that moved out of state to do a new application for whatever state he or she moves into because that would open a special enrollment period.

Daniel Ruske: Awesome, that is all of them. I’m going to answer a couple more here on the chat, but outside of that, that’s been most of them, so appreciate you guys.

Chris Cutler: Yeah, thank you.

Alek Johnson: Perfect, well again thank you everyone for taking the time to jump on. Again, as Daniel said there is going to be that quick survey after this. Any feedback that you have is great. Thank you for attending and we hope you have a good day.