The 10 Decisions That Can Make or Break Your Retirement
On this episode of Simply Money, Bob and Brian crash-test a $3 million retirement plan against market drops, overspending, family gifts, and an early death. Plus, they lay out a five-year retirement countdown, explain how to help your kids without creating financial problems, and discuss smart tax moves that could open up once the paycheck stops.
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Bob: Tonight, can your financial plan survive a series of crash tests? You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
Brian, let's do something a little fun tonight. We're going to pretend for a little bit. We're going to take a couple and pretend like we're throwing them in a garden variety, four-door sedan, or SUV, and we're going to crash test the sucker and see if these people survive. So, walk us through a hypothetical couple we'll call Mike and Karen.
Brian: That we are apparently going to almost murder. But sure, why not? Let's do this. What a great way to kick off a financial planning discussion. Expect the unexpected, is what we always say. So, let's call them Mike and Karen.
Bob: Brian, I can think of a few couples over the years where I would have loved to have done this with them.
Brian: This is true.
Bob: But I digress. Let's stick with numbers and financial planning.
Brian: Very true.
Bob: Introduce our listeners to our hypothetical couple and let's get into it.
Brian: Everyone, meet fake Mike and fake Karen. They're both 62 years old, greater Cincinnati. So, your house is paid off, kids are grown, and they've been working for 35, 40 years, and saving, saving, saving, just being diligent worker bees like we all do. And they've accumulated about $3 million worth of investable assets. $1.7 million in traditional IRAs, pre-tax 401(k)s as well. $500,000 in Roth tax-free treatment. And then there's another $800,000 outside of retirement assets in just plain, old taxable investments, you know, like a joint investment account or a trust, something like that, and cash.
By the way, I always love how we have to call those taxable investments. Everything's taxable. It's just taxable differently. When we say taxable, we basically just mean, not a retirement account, not currently tax sheltered. Anyway, most people would look at this and say, "$3 million in the bank, you're fine. What are you worried about? Go play golf. Get out of my face." And they might be fine. But here's the thing. $3 million is a lot of money, but it's not unlimited. Especially when you're looking, "We're retiring at 62," Mike and Karen might potentially be needing that money to support them for a good 30 years.
And we haven't even talked about their lifestyle yet. Well, they spend about $120,000 a year right now. That's 10,000 bucks a month. And some of that eventually is going to be covered by Social Security, but they're only 62, right? So, we've got to plan for 30, possibly, plus years of making this money spread out. And let's assume they don't want to immediately claim, right? Because as we all know, the longer we wait to file Social Security, the longer we get those 8% annual increases or 1 12th of 8% every month. So, that can be a... You know, these are all the different variables that they have to think about. And that's what makes these questions hard to answer. So, it's not simply, "Can we retire?" It's, how much can actually go wrong before this plan starts getting uncomfortable? So, Bob, take us through to disaster. Let's say we're skidding off the road and something happens. What is it?
Bob: Well, it's not really disaster. It's likely reality, as you already pointed out. And that's longevity risk. So, we want to run a financial plan, assuming that both spouses live to be, say, 95 years old. As you pointed out, for this couple, it's about 33 years of retirement. And what we don't want to do is have people get into their late 80s and early 90s and say, "Oh, no, I'm still alive. I've got too much life left at the end of my money. What happens now?" Because things can happen. Something's going to happen. Healthcare is going to happen. Home repairs, taxes, car replacement, travel, maybe helping those pesky children and grandchildren. And you're asking this $3 million portfolio to participate and fund all of it.
And that's where we want to crash test, or like we talk about all the time, stress test longevity risk. That's what we're really talking about here with crash test number one. The result for this couple when we run the numbers, yep, they're still standing. Everything's fine. But we can't just spend and spend and spend with no guard rails here. And that's where we put limits on that spending, keeping in mind longevity risk. So, let's move on to crash test number two that I think a lot of people aren't potentially thinking about right now. And this tends to rear its ugly head every 7 to 10 years or so. Get into what we're talking about with crash test number two, a market correction, Brian.
Brian: Yeah, and this is a typical stress test, right? This is something we do literally every single time we create and/or update a financial plan for somebody, which is simply to say, okay, let's run all the numbers assuming the hunky dory outcome. Nothing bad ever happens again. Here's your income, here's your outflow, and here's where your risks are. But now that's a baseline, let's run this again and say, what if we lose 20% to 25% of our net worth right now? And we're not predicting disaster or anything. We're simply simulating, what was it like for somebody who retired in 2021? And then we immediately had 2022, which was one of the 5 worst years we've ever had. Or somebody who retired in 2007, immediately got smacked in the face with 2008. So, this is simple stress testing.
So, let's pretend that Mike and Karen retire on Friday. They have the party. Everybody eats the sheet cake. Everything's wonderful. Have a few drinks with the friends on Saturday night. Monday morning, as soon as the market opens and they've slept in because it's their first day off. They wake up to super scary headlines, and all of a sudden, stocks drop about 30%. Now what? This is a timing concern, right? Well, this is one of the ones that matters most. What we're talking about here is sequence of returns risk.
So, if you suppose, say, $2 million of that $3 million we mentioned, if that's exposed to stocks, well, a 30% decline there is roughly a $600,000 decline on paper. And remember, peak to trough 2008 was more like 45% very briefly. It came back rather quickly to get off the mat, but still way down for the year. So, they didn't suddenly become bankrupt and destitute overnight, but all of a sudden, $3 million doesn't look like $3 million anymore. And they're looking at us saying, "Can we still get away with this $120,000 a year?" And so, that's why the retirement income strategy needed to exist before the market fell. We needed to have this laid out, and then stress tested so that we can figure out whether this ship is going to float no matter what storm it's facing. So, maybe there's a year or two of anticipated spending needs sitting in cash, Bob, as you and I often say, if you know you've got a bill come and due in 12 months, get it out of the market, especially when the market's at a peak. You know, maybe there were...
Bob: Yeah, tell us about it in advance so we can get it out of the market for you.
Brian: Yeah, that's fair.
Bob: Take your emotion out of it, yeah. Go ahead.
Brian: That's a great point, yeah. And that's a great point because we're all human beings, right? When the market is running like it does from time to time where things just kind of go straight to the moon for a while, then it's very tempting to say, "You know what? Yeah, we want to do the basement. And that money is invested, but let's just let it go. It's going to grow a little bit longer." You're virtually guaranteeing that it's going to take a step back before your brain will tell you that it's time to take some risk off the table. So, yes, plan ahead for that. Take the money while it's there. A bird in the hand is worth way more than two in the bush.
Bob: Yep. All right, let's move on to crash test number three. We've got, you know, the plan in place, and then lo and behold, these people retire fictitious. Mike and Karen, they told us they needed $120,000 a year. And then they retired, and you know what? They like retirement. They're traveling more. They're eating out more. They rent a place in Florida for six weeks a year because February in Cincinnati suddenly isn't as appealing when you don't have to be here. And at the end of the day, instead of spending $120,000 a year, they're spending $150,000. It's only another $30,000 a year. What's the big deal? And those words every year are what's the big deal. Because a one-time $30,000 expense is one thing. Factoring $30,000 of additional spending every year for the next 30 years is something entirely different.
And that's where we have to constantly monitor what people are actually spending, not what they just think they're going to spend. And we factor that in as a crash test. And we do that, Brian, it's another thing that we do when we model things out. Let's push this thing to the limit as far as unexpected or expected plan spending over and above what you thought you were going to spend, just so we know in advance what those guard rails are. In this case, this $30,000 extra add on, the car is still driving, but the warning light is now on because permanent increase in spending can be far more damaging than just those occasional big purchases when it comes to your long-term financial plan.
Brian: Yep. So, that brings us to number four. What happens if I want to support my kids? Crash test number four, the kids need $250,000 to start a business, buy a house, or more than one kid needs whatever. So, Mike and Karen say, "Yes, we've built our nest egg. We've done well. We do want to help our kids. And so, the question is, can we?" Or in other words, in this case, $250,000, that's more than 8% of that original $3 million. So, that means not saying no, but also not treating this like we're buying a refrigerator. Meaning, this isn't money... It's going to take a while to recover this, depending on what the market does. Remember what we just talked about with that stress test. Maybe they retired and the market continued on and everything was wonderful. What if we give this $250,000 away and now our portfolio consciously has declined by that amount, and then the market decides to do its thing? So, these are all things that, again, needs to be stress tested.
And there's also family questions here, right? If they've got two kids, are we giving that other kid $250,000, too? Or will we feel guilty six months a year from now and feel like we should have done the same thing? And all of a sudden, that $250,000 just became a $500,000 decision and we were really, really impacting the nest egg. So, if the plan says you can afford to help, great, go do it. That's awesome. One of the wonderful things money can do for a family, but generosity needs to come from the plan, not from guilt. So, the result of our crash test number four, this one is potentially survivable, still a major decision of $3 million, particularly if equal gifts need to be made to multiple children. So, let's move on. We've got number five here, and let's see what Bob has to say about an early death.
Bob: Well, yeah, crash test number five is certainly nothing to smile at or joke about. You know, Mike, let's say, the Mike and Karen scenario, let's say Mike passes away at age 70. That's a tough one. Karen is healthy. She lives to 95. What's our financial concern? First of all, the expenses don't just get cut in half because, you know, one member of the household passes away. One person is living in the house, but the property taxes are the same. The roof still costs the same. The HVAC system doesn't offer a widow's discount. A lot of household expenses remain, but income can change. The Social Security income changes. Perhaps if there's a pension involved, there's a cut in pension income. And eventually, Karen is dealing with a tax system as a single taxpayer instead of a married couple.
So, again, you want to crash test, no pun intended, that scenario as well when we're factoring all these other fixed and variable expenses heading into retirement. Because we do have to plan for, what if, you know, the disaster really does happen? In this case, you know, under crash test scenario number five, it's survivable, but the surviving spouse plan needs to be built while both spouses are around to participate in it and discuss it to make your plans accordingly. All right, Brian, we've run through five. There's many more we could cover. Maybe we'll do that on a future show.
Here's the Allworth advice, don't ask whether $3 million is enough to retire. Ask how many things could go wrong before your $3 million so-called plan needs to change. Coming up next, we're giving you the retirement countdown. What should happen five years out, three years out, one year out, and on the day, you finally call it a career and retire. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you know you'll leave a meaningful amount of money to your kids someday, should that change how you invest your portfolio today? Plus, how much should future tax law changes influence your overall financial plan? We'll tackle both of those questions straight ahead. Well, if retirement is five years away or whenever you get to really seriously considering retirement, there are decisions you should be making that could have an enormous impact on your first decade without a paycheck. We're going to call this the retirement countdown, Brian. Let's talk about what we need to be doing, let's say, five years ahead of time.
Brian: Well, five years out, you want to stop only thinking about accumulation, right? This is a bigger shift than I think people anticipate. The accumulation stage, that's where you spend most of your working career, right? From the very first time you get a job and you get that 401(k) signup form, you have launched your accumulation stage and it's going to last for 30, maybe 40 years. Well, now all of a sudden, the runway is in sight. So, five years out, you know, no longer obsessing what you're going to do for the rest of your career. You're kind of starting to think about, what are the bigger questions, right? Forget work, what does retirement actually cost me? Not, "Hey, I think we'll probably spend less, so all we got to do is keep it below our take-home pay." That's not the case. And that's not necessarily something to shoot at. That can be sacrificing too much.
When I'm talking to a client who's in this stage, I want to know what you're spending now. What is your lifestyle cost now? Because what you're doing now is going to rhyme an awful lot with the future. It won't be exactly the same. But housing, yeah, whatever house you live in is going to cost you the same to maintain whether you're leaving it for work every day or not. Travel, that's probably going to go up because you're going to have more time to do it, of course.
And so, what I usually tell people is, "How many trips do you take? What? A couple of trips to the beach every year? Cool. Are we going to do that twice as much, three times as much? Are we going to do bigger stuff?" Whatever. You will have time, and you'll want to take advantage of that. Let's make sure we don't forget about cars. We're going to have to replace the vehicles every now and then. Healthcare is its own deal. Everybody worries about that, but we have data from Medicare that helps us understand out-of-pocket expenses. And then other things like, helping the kids can be quite a price tag for some people. Country club memberships, whatever those life items actually cos.
Now, we can look at, you know, that's your current expenses. And then tell me what's going to change in retirement, right? So, five years out is also a good time to start looking at your investment risk. I didn't say you're five years from retirement, so let's panic, and sell all your stocks. That's not the case. Let's just make sure we know what got us here in the first place. So, if you're a tire at 65, some of this money might need to support you at 90. Those dollars, that's still got a 35-year time frame. And so, it's okay to stay aggressive with that. I think I said 35, 25 years. I'm rolling and the math gets a little weak sometimes. But the rest of the dollars, we're simply talking about timing. Figure out what you're going to need and when, and then adjust your investments accordingly. It's not, "I am retired, therefore it must all be conservative."
Bob: All right, let's talk about what to do three years out. If we're using this land the plane metaphor, we'll call three years out the time where you want to start building the runway, so to speak. Now, we want the plan to get a little more specific. And the big question becomes, where is your first retirement paycheck coming from when you're no longer working and getting that check from your employer? Let's say you retire at 65. Are you claiming Social Security immediately, waiting until 67, waiting until 70? Does one spouse claim while the other delays? Do you have a pension? If you do, are you taking a lump sum or a monthly income? If it's monthly income, what survivor options are you choosing?
These aren't decisions you want to make three days before your retirement party. For most people, if you can get out in front of this three years in advance, it makes the whole process a lot smoother and people retire with a lot more confidence. And this is where that cash reserve discussion becomes important, too. If you retire and six months later, the stock market drops say 20%, 25%, we don't want you to come and say, "Well, I need $10,000 to fix the deck this month," and have to go in and sell stocks while they're down. So, three years out is a good time to start thinking about where those first paychecks are going to come from. You know, health care considerations, Medigap coverage, all that stuff. We want to start doing the income planning, if possible, about three years in advance. And then, Brian, take us to the one-year out discussions that need to be taking place.
Brian: Runway is in sight. We can hear the landing gear coming out. So, now is the time to practice. So, you've told us that retirement is going to cost $10,000 a month. Well, cool. Prove it. Next several months, live on that amount. See if it really works out that way. Take the rest of that paycheck and save it somewhere. You're going to end in and save it maybe for that celebratory trip or whatever that you're going to take after as soon as you get done. So, tax planning is also critical at this point. Think about what's going to happen to your taxable income.
You're making $300,000, $400,000 right now. All of a sudden, the paycheck disappears. Maybe Social Security hasn't started and Required Minimum Distributions are years away. You could find yourself in one of the lowest tax years you've had in decades. Now, you've got planning opportunities. So, it's not all about, "How much am I going to spend? What opportunities might I have to take advantage of?" So, that last year is the year to start learning about that stuff so that you're ready to pull the trigger that next first year of a lower tax situation.
And then, of course, there's always the boring stuff, right? Estate documents. When's the last time you looked at your will, your trust, powers of attorney for finance and health care, beneficiary designations, all that kind of stuff. This is a good... This last year is a good time to do that. So, you can kind of hit the ground running when you retire without having to chase all those things, because that just adds a bunch of stress.
And then we have the final 90 days. This is when everybody assumes that there must be paperwork. "I'm going to retire in three months. Therefore, I must have to fill out a form or check a box or inform the federal government or something." And that's not really necessarily true. Obviously, your HR department needs to know what your plan is. And you need to be thinking about, "What's health care going to look like? Am I on COBRA? Do I understand how that works? Am I going straight to Medicare based on my age?" All those kinds of things. Those last 90 days, that's going to be the time to pull the trigger and making sure all of those are in place ready for retirement day, which Bob's going to tell us about.
Bob: All right. Yep, Brian, we've reached the big day. You've turned in the laptop. You've got that retirement cake. Everybody in the office tells you they're jealous. What financial moves do you make today on that retirement day? Hopefully, not much, because if we've done this correctly, retirement day should not create a financial emergency because the income plan is already built. The investment strategy is already built. Health care is handled. Social Security decision has been made. The pension decision, all that. We've updated the estate plan and we're done. We're good. It's time to enjoy retirement.
Here's the Allworth advice, don't treat retirement like a date on the calendar. Use the five years leading up to it to systematically prepare your spending, investments, taxes, health care, and income. So, your final paycheck doesn't come with financial surprises. Coming up next, the well-intentioned mistakes wealthy families make, from giving too much too soon to leaving the kids a vacation home, nobody actually really wants. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your favorite podcast. Well, if you've done well financially, chances are you want some of that success to spill over and help your kids and grandkids someday or maybe even right now. But even with the best intentions, helping family financially can sometimes create expectations, dependence, and even resentment. Brian, I know you and I are starting to run into this situation often these days. This is an important topic to cover.
Brian: Yep, and we all want to help our kids, help our family. And so, the mistake that can be made here is giving too much and too soon. But it's hard to tell what too much is. That's the problem. There's really no universal number. But although we get asked that question all time, how much can I give my kids, you know, without worrying about it? As if there's, you know, like an IRS guideline or something like that. You know, $100,000 gift to a 35-year-old could be transformative for that person based on their situation. The same $100,000 to another 35-year-old might make them a complete disaster if they're not prepared to handle it.
So, before I ask, you know, "Can mom and dad afford to even give this in the first place?" The first question I want to ask is, "Is the kid prepared to receive it?" These are two very different questions. Being prepared to give it is very different from being prepared to receive it. They don't happen at the same time. You know, because financial planning software, that that's easy. We can do the math to figure out whether mom and dad can afford it. That's just math. It can't tell me whether that 32-year-old is ready to handle that half million dollar gift that people sometimes consider.
You know, and money, of course, tends to magnify behavior. Whatever you do with less money, you'll do probably more of with more money. If you've got a responsible child who's saving, working, making good decisions, that gift might accelerate a down payment, maybe an education, investment, or maybe a business opportunity they're considering. On the other hand, if you've got somebody who spends every dollar they make, and then handing them a giant check really doesn't solve the problem. Probably just makes it worse. So, sometimes, the best gift you can give them isn't more money, it's more structure around the money. Help them understand how you built what you built, how you got where you are, and what it could mean for them if they can get some guidelines in their own lives for those people who are a little more challenged understanding how the money works. So, another mistake here Bob's going to tell us about is very similar. Bob, tell us about what happens when we pay for everything for our family.
Bob: Well, you know, mom and dad become the family ATM. They pay for all the vacations, the cars, the private school, the grandkids college, club memberships. I mean, in an extreme, hell, I'm not buying my kids a club membership, but maybe part of the mortgage, and individually, every check feels manageable. I want to go back to what you were talking about before because, you know, my wife and I are starting to live through this right now, Brian. Our kids and their spouses, they're all in their, you know, mid 20s to early 30s. And, you know, if you think parenting comes to an end, it just doesn't. Just the decisions come with bigger dollar amounts.
And, you know, what I always tell my kids is, "Hey, play stupid games, you win stupid prizes, and those prizes come with bigger dollar amounts attached to it." And I agree with what you said at the outset of the segment. The most important thing here is to, hopefully, equip your kids how to be responsible on their own. And I'm just telling you as a father, if I can see that that's happening, if they're living within their budget, if they're handling money wisely and all that, and we could come along and do something small to help really take some of the stress off, if they are being responsible with money, I feel a whole lot better about that than, you know, just bailing people out from a stupid emergency that they created.
I'm really not down for that. My wife and I are not down for that. Sometimes you got to, you know, get into a triage situation. But, yeah, it's all about, you know, blending. And there's no science to it. You just got to work through it. It's blending, helping them get responsible with, you know, treating them, hopefully, fairly. And fair doesn't have to be equal, all of that. It's definitely more of an art than a science. I know you're going through this with some of your kids as well, Brian. What are your thoughts on that? And more importantly, what are you seeing clients work through when you meet with them in the office?
Brian: Yeah, I see, you know, if money is given without some kind of structure, without some kind of, "Here's why I'm doing this to you and here's what I expect you to do with it. Here's the outcome I expect." Not necessarily, "Here's exactly how I want you to spend it," but, "Here's how I want your life to change, improve, whatever, because I've given you this. You figure out how to get there. But this is why I'm giving it to you, because I have this goal for you." If gifts are made without that in mind, then that can be an absolute mess because one side has expectations that the other side, maybe in a best case scenario, simply, innocently isn't aware of, or worst case scenario, is aware of and just plain doesn't care. And that's not going to end very well. But, yeah, so...
Bob: Brian, the behavior really never changes. Whether somebody's 16, 36 or 66, we all kind of behave the same way. We like nice things. We like life to be easy. And my point is, you know, the mistakes we all make at age 16 are no different. They just come with a lot bigger dollar signs attached to it when you're 36, 46, or 56. That's really the point I'm trying to make. So, you know, equipping people to handle money appropriately and correctly is really what we want to accomplish here.
Brian: That's absolutely right. You know, so let's talk about, you know, the third mistake that might come up here is trying to be equal instead of being fair. So, this is dangerous territory. Now you got three kids. One is a doctor making half a million dollars a year. One's a teacher with a solid pension well off into the future. Three kids, though, obviously, a little less income than their doctor sibling. The third maybe has a disability or some other circumstance requiring additional support. So, how do you deal with this? Do you give each kid exactly the same amount?
And again, remember what we're talking about here? We're not talking about ongoing support. We're simply talking about, you know, "I've got more than I need and I want to see my kids benefit from it right now." Well, you may have been helping one of these kids all along. So, how do you deal with the fairness issue here? There's no perfect answer. I mean, these folks are, let's say, 48 years old and can still tell you exactly who got the nicer Christmas present in 1987. Some people score out there.
Bob: Yep, they remember.
Brian: You don't owe anybody anything. But if you're making substantially unequal gifts, then you're going to create some kind of issue down the road. So, make sure you explain it and you maybe even put it in writing. Otherwise, without that, they're going to make their own explanation after you're gone.
Bob: And the same thing applies to those, "loans" to kids, family vacation homes that nobody wants, all that kind of stuff. Here's the Allworth advice, don't just prepare your wealth for your children, prepare your children for the wealth, and communicate your intentions before money has a chance to create unnecessary family problems. Well, if retirement means a big drop in your income, could that actually create a smart window to intentionally realize capital gains? It's one of your questions we'll answer next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? If so, there's a red button you can click while you're listening to the show if you're listening on the iHeart app. Simply record your question there, and it will come straight to us. Paul in Anderson leads us off tonight, Brian. He says, "I'm planning to retire in the next couple of years, and my income should drop quite a bit. Should I be intentionally realizing capital gains once I retire. And I'm in a lower tax bracket?"
Brian: Yeah, I think this is not a bad idea. So often, it does make sense to deliberately realize some of these long-term capital gains after retirement. Remember, for those you might not be familiar, we're not talking about 401(k) IRA. We're talking about a taxable account, you know, something that spits out of 1099 every year with dividends and interest and whatever. You know, so what we're talking about is purposely selling something and incurring that gain. Think of this time as a gain-harvesting window. Your wages are down, but that portfolio may still be producing dividends, interest, embedded gains.
And one thing I'll throw out there, if you're in a situation where you can truly not have any taxable income, then it's possible you realize up to, you know, say, $98,000 and still land in the 0% federal, long-term capital gains bracket. Yes, that's what I said. If you literally have no income, you know, no pension, no Social Security, you're not working at all, perfect scenario here, you could recognize almost $99,000 worth of capital gains and be in that 0% long-term bracket. That is possible out there. So, you know, what you want to be thinking about here is that it doesn't necessarily mean sell everything. These gains stack on top of other taxable income, assuming you're not one of these rare people who can truly eliminate all of it.
And some other things to keep in mind, too, is these gains can make more of your Social Security taxable if it pushes you over a certain amount. And if you're buying health insurance through the Affordable Care Act, you know, the before Medicare, then gains can reduce those premium subsidies that are even out there for those that remain. So, in any case, lots of moving parts to it, but there are opportunities to be had to consider going ahead and taking some of these capital gains here. And again, you're also freeing up dollars that you could spend on goals that you determined a long time ago. A lot of people convince themselves that there's taxes involved here. That means I simply can't sell any of these assets. Well, if that's really the case, then I can't consider them part of your financial support for your financial plan.
Don't let the tax tail wag the dog. Taxes are coming due one way or another. Just understand what the impact is and plan for it. Treat it like another necessary outflow, just like the goals that you have. Yeah, there's taxes that are going to come along with it. That's all math that can be done in advance. It's not something to be afraid of. Dave and Mary in Tampa, Florida, podcast listeners outside the reach of our antennas here locally in Cincinnati. Appreciate that. Dave and Mary say they're financially independent and they think they won't spend everything they have. We've heard this one before. "Should we be investing differently if a meaningful part of the portfolio is really for our kids rather than for us?" How do you handle that, Bob?
Bob: Well, I would say possibly. First of all, make sure you stress test, Dave and Mary, your personal financial plan for all the things that could go wrong. I don't say that to scare you. You just want to make sure that we really build that financial plan to make sure it takes care of the two of you and with a lot of wiggle room involved. If the answer is still, "yep, we're not going to need a sizable amount of money." If your personal investment risk tolerance tolerates that, you certainly, from a tax standpoint, want to try to move from the ordinary income ledger to the capital gains ledger. Meaning, invest more for growth in your taxable accounts. Possibly do aggressive Roth conversions where your heirs would pay no taxes.
We see this from time to time. Couples are more than willing to pay some of the taxes right now in a low tax bracket to take care of that tax burden for their kids. So, there's certainly things that you could do, both by getting to the capital gains side of the ledger, being more growth oriented, and possibly, never have anybody pay any taxes because of the stepped up basis for capital gains assets. So, certainly something to talk about with your advisor, but again, make sure your plan is going to float in any scenario that might come down the road. Hope that helps. We've got time for one more. Jim in Montgomery says, "How much weight should we put on future tax law changes when making decisions today? I don't want to avoid a good strategy just because Congress might change something, but I also don't want our whole plan depending on one tax rule, staying around forever." Brian?
Brian: Yeah, this is an interesting question. There's an interesting viewpoint in here, which is, I realize that there's a loophole or some kind of opportunity or whatever, but loopholes get closed, things go away. I kind of think back to when backdoor Roth conversions were very, very first a thing. The IRS put income limits on what you could do on whether you could make a contribution directly to a Roth. But then there were different rules around converting a non-deductible IRA. And it was a loophole for a long time until the IRS finally said, "You know what? This is cool. Go ahead and do it." Which is totally stupid, but anyway, they should just allow it. Anyhow, that's not the question that was asked, but that reminds me what this is. People were super hesitant to mess around with those backdoor conversions because of that.
So, the good financial plan starts with today's law. That's the only rule book you can actually use. And then pressure test against reasonable alternatives. What if tax rates are higher later? What if they're lower? What if the estate tax exemption changes, right? That's changed enormously over the last decades of most people's accumulation years. What if capital gains rates go up, if they go down, whatever. If your plan works across all of these, now you've built something durable and you can focus on the efficiency of whatever all these options are. But remember, start with the laws the way they're on the books right now. Don't make new things up. And again, if it's written in stone right now, currently in law, doesn't mean it can't change, but it takes an awful lot for that to happen. So, be open to taking a little bit of, "risk" that something might change.
Bob: Coming up next, something we want some of you to perhaps stop doing right now. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Well, if checking your investment accounts has become part of your morning routine right alongside drinking your coffee, checking the weather, reading the newspaper, if newspapers are still a thing, you may be doing more harm than good, Brian. What are we talking about here?
Brian: So, you know, checking doesn't actually give you more control, right? If I'm trying to grow a vegetable garden, it's not going to help if I go pull everything up by the roots once a week to see how it looks. Just giving me more opportunities to react to whatever's happening, even though there's probably very little I can do in the exact moment in time. So, you know, if I see my portfolio is down $70,000 before lunch and I think, "Oh, my gosh, should I sell something? Should I move some money to cash? Is this the beginning of the end? Is this something bigger down on the horizon here?" The real question should actually be, "Has anything about my long-term financial plan actually changed since yesterday?"
Stuff goes up and down. A lot of times that $70,000, people will always tell me, they tell me how many dollars they lost in 2008. Everybody likes to go back to that. And they talk about the dollars. They don't talk about the percentages. And a lot of people who had a decently diversified portfolio absolutely lost a chunk of money, but it wasn't as bad as what the market was. And frankly, it didn't hurt them in the long run anyway. It hurt in the short run for sure. Stuff happens. But it doesn't hurt in the long run as long as we don't get ourselves into trouble.
So, right, you spend 30 or 40 years building this pile of money. You feel responsible for protecting it. That's completely understandable. This didn't get created overnight. I have to protect it. This is something that took my lifetime to build. We want to watch out for it, but monitoring that portfolio isn't the same as managing your portfolio. So, a good portfolio management, well, that just means making changes for a reason. And that reason shouldn't be because something happened 10 minutes ago. Maybe your goals changed, your risk tolerance changed. Maybe it's just time for rebalancing and nothing has changed. Or tax loss harvesting, you've just learned about that. Those are all good reasons to make some changes. Right, Bob?
Bob: Yeah. And I think, you know, for the people that get nervous about market volatility, you know, at least from my experience, this is less about the long-term financial plan and more about just getting glued to some of the headlines and people thinking, "You know what? I know I should think long-term. I know my plan's good," yada, yada, yada. But "this time it's different," pops in. And people want to solve all the problems in the world or think these problems have never happened before. And I think that's where taking people through, you know, during a review meeting, some actual historical events that have happened over the last 60, 70, 80 years in the market. Once people can actually see that things like this have happened before, even if it doesn't feel like it, they're able to walk away not quite worried as much about some of the recent headlines, even though the media exists to make us think this time is different and you better do something because the sky is falling. That's my perspective on it.
Brian: I think that's a great perspective and that's something that comes up regularly. We're all human beings and that's how we react to it.
Bob: Here's the Allworth advice, measure your financial progress in years, not afternoons. The more often you watch your portfolio move, the more opportunities you give your emotions to interfere with a good, long-term plan. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Brian, let's do something a little fun tonight. We're going to pretend for a little bit. We're going to take a couple and pretend like we're throwing them in a garden variety, four-door sedan, or SUV, and we're going to crash test the sucker and see if these people survive. So, walk us through a hypothetical couple we'll call Mike and Karen.
Brian: That we are apparently going to almost murder. But sure, why not? Let's do this. What a great way to kick off a financial planning discussion. Expect the unexpected, is what we always say. So, let's call them Mike and Karen.
Bob: Brian, I can think of a few couples over the years where I would have loved to have done this with them.
Brian: This is true.
Bob: But I digress. Let's stick with numbers and financial planning.
Brian: Very true.
Bob: Introduce our listeners to our hypothetical couple and let's get into it.
Brian: Everyone, meet fake Mike and fake Karen. They're both 62 years old, greater Cincinnati. So, your house is paid off, kids are grown, and they've been working for 35, 40 years, and saving, saving, saving, just being diligent worker bees like we all do. And they've accumulated about $3 million worth of investable assets. $1.7 million in traditional IRAs, pre-tax 401(k)s as well. $500,000 in Roth tax-free treatment. And then there's another $800,000 outside of retirement assets in just plain, old taxable investments, you know, like a joint investment account or a trust, something like that, and cash.
By the way, I always love how we have to call those taxable investments. Everything's taxable. It's just taxable differently. When we say taxable, we basically just mean, not a retirement account, not currently tax sheltered. Anyway, most people would look at this and say, "$3 million in the bank, you're fine. What are you worried about? Go play golf. Get out of my face." And they might be fine. But here's the thing. $3 million is a lot of money, but it's not unlimited. Especially when you're looking, "We're retiring at 62," Mike and Karen might potentially be needing that money to support them for a good 30 years.
And we haven't even talked about their lifestyle yet. Well, they spend about $120,000 a year right now. That's 10,000 bucks a month. And some of that eventually is going to be covered by Social Security, but they're only 62, right? So, we've got to plan for 30, possibly, plus years of making this money spread out. And let's assume they don't want to immediately claim, right? Because as we all know, the longer we wait to file Social Security, the longer we get those 8% annual increases or 1 12th of 8% every month. So, that can be a... You know, these are all the different variables that they have to think about. And that's what makes these questions hard to answer. So, it's not simply, "Can we retire?" It's, how much can actually go wrong before this plan starts getting uncomfortable? So, Bob, take us through to disaster. Let's say we're skidding off the road and something happens. What is it?
Bob: Well, it's not really disaster. It's likely reality, as you already pointed out. And that's longevity risk. So, we want to run a financial plan, assuming that both spouses live to be, say, 95 years old. As you pointed out, for this couple, it's about 33 years of retirement. And what we don't want to do is have people get into their late 80s and early 90s and say, "Oh, no, I'm still alive. I've got too much life left at the end of my money. What happens now?" Because things can happen. Something's going to happen. Healthcare is going to happen. Home repairs, taxes, car replacement, travel, maybe helping those pesky children and grandchildren. And you're asking this $3 million portfolio to participate and fund all of it.
And that's where we want to crash test, or like we talk about all the time, stress test longevity risk. That's what we're really talking about here with crash test number one. The result for this couple when we run the numbers, yep, they're still standing. Everything's fine. But we can't just spend and spend and spend with no guard rails here. And that's where we put limits on that spending, keeping in mind longevity risk. So, let's move on to crash test number two that I think a lot of people aren't potentially thinking about right now. And this tends to rear its ugly head every 7 to 10 years or so. Get into what we're talking about with crash test number two, a market correction, Brian.
Brian: Yeah, and this is a typical stress test, right? This is something we do literally every single time we create and/or update a financial plan for somebody, which is simply to say, okay, let's run all the numbers assuming the hunky dory outcome. Nothing bad ever happens again. Here's your income, here's your outflow, and here's where your risks are. But now that's a baseline, let's run this again and say, what if we lose 20% to 25% of our net worth right now? And we're not predicting disaster or anything. We're simply simulating, what was it like for somebody who retired in 2021? And then we immediately had 2022, which was one of the 5 worst years we've ever had. Or somebody who retired in 2007, immediately got smacked in the face with 2008. So, this is simple stress testing.
So, let's pretend that Mike and Karen retire on Friday. They have the party. Everybody eats the sheet cake. Everything's wonderful. Have a few drinks with the friends on Saturday night. Monday morning, as soon as the market opens and they've slept in because it's their first day off. They wake up to super scary headlines, and all of a sudden, stocks drop about 30%. Now what? This is a timing concern, right? Well, this is one of the ones that matters most. What we're talking about here is sequence of returns risk.
So, if you suppose, say, $2 million of that $3 million we mentioned, if that's exposed to stocks, well, a 30% decline there is roughly a $600,000 decline on paper. And remember, peak to trough 2008 was more like 45% very briefly. It came back rather quickly to get off the mat, but still way down for the year. So, they didn't suddenly become bankrupt and destitute overnight, but all of a sudden, $3 million doesn't look like $3 million anymore. And they're looking at us saying, "Can we still get away with this $120,000 a year?" And so, that's why the retirement income strategy needed to exist before the market fell. We needed to have this laid out, and then stress tested so that we can figure out whether this ship is going to float no matter what storm it's facing. So, maybe there's a year or two of anticipated spending needs sitting in cash, Bob, as you and I often say, if you know you've got a bill come and due in 12 months, get it out of the market, especially when the market's at a peak. You know, maybe there were...
Bob: Yeah, tell us about it in advance so we can get it out of the market for you.
Brian: Yeah, that's fair.
Bob: Take your emotion out of it, yeah. Go ahead.
Brian: That's a great point, yeah. And that's a great point because we're all human beings, right? When the market is running like it does from time to time where things just kind of go straight to the moon for a while, then it's very tempting to say, "You know what? Yeah, we want to do the basement. And that money is invested, but let's just let it go. It's going to grow a little bit longer." You're virtually guaranteeing that it's going to take a step back before your brain will tell you that it's time to take some risk off the table. So, yes, plan ahead for that. Take the money while it's there. A bird in the hand is worth way more than two in the bush.
Bob: Yep. All right, let's move on to crash test number three. We've got, you know, the plan in place, and then lo and behold, these people retire fictitious. Mike and Karen, they told us they needed $120,000 a year. And then they retired, and you know what? They like retirement. They're traveling more. They're eating out more. They rent a place in Florida for six weeks a year because February in Cincinnati suddenly isn't as appealing when you don't have to be here. And at the end of the day, instead of spending $120,000 a year, they're spending $150,000. It's only another $30,000 a year. What's the big deal? And those words every year are what's the big deal. Because a one-time $30,000 expense is one thing. Factoring $30,000 of additional spending every year for the next 30 years is something entirely different.
And that's where we have to constantly monitor what people are actually spending, not what they just think they're going to spend. And we factor that in as a crash test. And we do that, Brian, it's another thing that we do when we model things out. Let's push this thing to the limit as far as unexpected or expected plan spending over and above what you thought you were going to spend, just so we know in advance what those guard rails are. In this case, this $30,000 extra add on, the car is still driving, but the warning light is now on because permanent increase in spending can be far more damaging than just those occasional big purchases when it comes to your long-term financial plan.
Brian: Yep. So, that brings us to number four. What happens if I want to support my kids? Crash test number four, the kids need $250,000 to start a business, buy a house, or more than one kid needs whatever. So, Mike and Karen say, "Yes, we've built our nest egg. We've done well. We do want to help our kids. And so, the question is, can we?" Or in other words, in this case, $250,000, that's more than 8% of that original $3 million. So, that means not saying no, but also not treating this like we're buying a refrigerator. Meaning, this isn't money... It's going to take a while to recover this, depending on what the market does. Remember what we just talked about with that stress test. Maybe they retired and the market continued on and everything was wonderful. What if we give this $250,000 away and now our portfolio consciously has declined by that amount, and then the market decides to do its thing? So, these are all things that, again, needs to be stress tested.
And there's also family questions here, right? If they've got two kids, are we giving that other kid $250,000, too? Or will we feel guilty six months a year from now and feel like we should have done the same thing? And all of a sudden, that $250,000 just became a $500,000 decision and we were really, really impacting the nest egg. So, if the plan says you can afford to help, great, go do it. That's awesome. One of the wonderful things money can do for a family, but generosity needs to come from the plan, not from guilt. So, the result of our crash test number four, this one is potentially survivable, still a major decision of $3 million, particularly if equal gifts need to be made to multiple children. So, let's move on. We've got number five here, and let's see what Bob has to say about an early death.
Bob: Well, yeah, crash test number five is certainly nothing to smile at or joke about. You know, Mike, let's say, the Mike and Karen scenario, let's say Mike passes away at age 70. That's a tough one. Karen is healthy. She lives to 95. What's our financial concern? First of all, the expenses don't just get cut in half because, you know, one member of the household passes away. One person is living in the house, but the property taxes are the same. The roof still costs the same. The HVAC system doesn't offer a widow's discount. A lot of household expenses remain, but income can change. The Social Security income changes. Perhaps if there's a pension involved, there's a cut in pension income. And eventually, Karen is dealing with a tax system as a single taxpayer instead of a married couple.
So, again, you want to crash test, no pun intended, that scenario as well when we're factoring all these other fixed and variable expenses heading into retirement. Because we do have to plan for, what if, you know, the disaster really does happen? In this case, you know, under crash test scenario number five, it's survivable, but the surviving spouse plan needs to be built while both spouses are around to participate in it and discuss it to make your plans accordingly. All right, Brian, we've run through five. There's many more we could cover. Maybe we'll do that on a future show.
Here's the Allworth advice, don't ask whether $3 million is enough to retire. Ask how many things could go wrong before your $3 million so-called plan needs to change. Coming up next, we're giving you the retirement countdown. What should happen five years out, three years out, one year out, and on the day, you finally call it a career and retire. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you know you'll leave a meaningful amount of money to your kids someday, should that change how you invest your portfolio today? Plus, how much should future tax law changes influence your overall financial plan? We'll tackle both of those questions straight ahead. Well, if retirement is five years away or whenever you get to really seriously considering retirement, there are decisions you should be making that could have an enormous impact on your first decade without a paycheck. We're going to call this the retirement countdown, Brian. Let's talk about what we need to be doing, let's say, five years ahead of time.
Brian: Well, five years out, you want to stop only thinking about accumulation, right? This is a bigger shift than I think people anticipate. The accumulation stage, that's where you spend most of your working career, right? From the very first time you get a job and you get that 401(k) signup form, you have launched your accumulation stage and it's going to last for 30, maybe 40 years. Well, now all of a sudden, the runway is in sight. So, five years out, you know, no longer obsessing what you're going to do for the rest of your career. You're kind of starting to think about, what are the bigger questions, right? Forget work, what does retirement actually cost me? Not, "Hey, I think we'll probably spend less, so all we got to do is keep it below our take-home pay." That's not the case. And that's not necessarily something to shoot at. That can be sacrificing too much.
When I'm talking to a client who's in this stage, I want to know what you're spending now. What is your lifestyle cost now? Because what you're doing now is going to rhyme an awful lot with the future. It won't be exactly the same. But housing, yeah, whatever house you live in is going to cost you the same to maintain whether you're leaving it for work every day or not. Travel, that's probably going to go up because you're going to have more time to do it, of course.
And so, what I usually tell people is, "How many trips do you take? What? A couple of trips to the beach every year? Cool. Are we going to do that twice as much, three times as much? Are we going to do bigger stuff?" Whatever. You will have time, and you'll want to take advantage of that. Let's make sure we don't forget about cars. We're going to have to replace the vehicles every now and then. Healthcare is its own deal. Everybody worries about that, but we have data from Medicare that helps us understand out-of-pocket expenses. And then other things like, helping the kids can be quite a price tag for some people. Country club memberships, whatever those life items actually cos.
Now, we can look at, you know, that's your current expenses. And then tell me what's going to change in retirement, right? So, five years out is also a good time to start looking at your investment risk. I didn't say you're five years from retirement, so let's panic, and sell all your stocks. That's not the case. Let's just make sure we know what got us here in the first place. So, if you're a tire at 65, some of this money might need to support you at 90. Those dollars, that's still got a 35-year time frame. And so, it's okay to stay aggressive with that. I think I said 35, 25 years. I'm rolling and the math gets a little weak sometimes. But the rest of the dollars, we're simply talking about timing. Figure out what you're going to need and when, and then adjust your investments accordingly. It's not, "I am retired, therefore it must all be conservative."
Bob: All right, let's talk about what to do three years out. If we're using this land the plane metaphor, we'll call three years out the time where you want to start building the runway, so to speak. Now, we want the plan to get a little more specific. And the big question becomes, where is your first retirement paycheck coming from when you're no longer working and getting that check from your employer? Let's say you retire at 65. Are you claiming Social Security immediately, waiting until 67, waiting until 70? Does one spouse claim while the other delays? Do you have a pension? If you do, are you taking a lump sum or a monthly income? If it's monthly income, what survivor options are you choosing?
These aren't decisions you want to make three days before your retirement party. For most people, if you can get out in front of this three years in advance, it makes the whole process a lot smoother and people retire with a lot more confidence. And this is where that cash reserve discussion becomes important, too. If you retire and six months later, the stock market drops say 20%, 25%, we don't want you to come and say, "Well, I need $10,000 to fix the deck this month," and have to go in and sell stocks while they're down. So, three years out is a good time to start thinking about where those first paychecks are going to come from. You know, health care considerations, Medigap coverage, all that stuff. We want to start doing the income planning, if possible, about three years in advance. And then, Brian, take us to the one-year out discussions that need to be taking place.
Brian: Runway is in sight. We can hear the landing gear coming out. So, now is the time to practice. So, you've told us that retirement is going to cost $10,000 a month. Well, cool. Prove it. Next several months, live on that amount. See if it really works out that way. Take the rest of that paycheck and save it somewhere. You're going to end in and save it maybe for that celebratory trip or whatever that you're going to take after as soon as you get done. So, tax planning is also critical at this point. Think about what's going to happen to your taxable income.
You're making $300,000, $400,000 right now. All of a sudden, the paycheck disappears. Maybe Social Security hasn't started and Required Minimum Distributions are years away. You could find yourself in one of the lowest tax years you've had in decades. Now, you've got planning opportunities. So, it's not all about, "How much am I going to spend? What opportunities might I have to take advantage of?" So, that last year is the year to start learning about that stuff so that you're ready to pull the trigger that next first year of a lower tax situation.
And then, of course, there's always the boring stuff, right? Estate documents. When's the last time you looked at your will, your trust, powers of attorney for finance and health care, beneficiary designations, all that kind of stuff. This is a good... This last year is a good time to do that. So, you can kind of hit the ground running when you retire without having to chase all those things, because that just adds a bunch of stress.
And then we have the final 90 days. This is when everybody assumes that there must be paperwork. "I'm going to retire in three months. Therefore, I must have to fill out a form or check a box or inform the federal government or something." And that's not really necessarily true. Obviously, your HR department needs to know what your plan is. And you need to be thinking about, "What's health care going to look like? Am I on COBRA? Do I understand how that works? Am I going straight to Medicare based on my age?" All those kinds of things. Those last 90 days, that's going to be the time to pull the trigger and making sure all of those are in place ready for retirement day, which Bob's going to tell us about.
Bob: All right. Yep, Brian, we've reached the big day. You've turned in the laptop. You've got that retirement cake. Everybody in the office tells you they're jealous. What financial moves do you make today on that retirement day? Hopefully, not much, because if we've done this correctly, retirement day should not create a financial emergency because the income plan is already built. The investment strategy is already built. Health care is handled. Social Security decision has been made. The pension decision, all that. We've updated the estate plan and we're done. We're good. It's time to enjoy retirement.
Here's the Allworth advice, don't treat retirement like a date on the calendar. Use the five years leading up to it to systematically prepare your spending, investments, taxes, health care, and income. So, your final paycheck doesn't come with financial surprises. Coming up next, the well-intentioned mistakes wealthy families make, from giving too much too soon to leaving the kids a vacation home, nobody actually really wants. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you can't listen to "Simply Money" live every night, subscribe and get our daily podcast. Just search "Simply Money" on the iHeart app or wherever you find your favorite podcast. Well, if you've done well financially, chances are you want some of that success to spill over and help your kids and grandkids someday or maybe even right now. But even with the best intentions, helping family financially can sometimes create expectations, dependence, and even resentment. Brian, I know you and I are starting to run into this situation often these days. This is an important topic to cover.
Brian: Yep, and we all want to help our kids, help our family. And so, the mistake that can be made here is giving too much and too soon. But it's hard to tell what too much is. That's the problem. There's really no universal number. But although we get asked that question all time, how much can I give my kids, you know, without worrying about it? As if there's, you know, like an IRS guideline or something like that. You know, $100,000 gift to a 35-year-old could be transformative for that person based on their situation. The same $100,000 to another 35-year-old might make them a complete disaster if they're not prepared to handle it.
So, before I ask, you know, "Can mom and dad afford to even give this in the first place?" The first question I want to ask is, "Is the kid prepared to receive it?" These are two very different questions. Being prepared to give it is very different from being prepared to receive it. They don't happen at the same time. You know, because financial planning software, that that's easy. We can do the math to figure out whether mom and dad can afford it. That's just math. It can't tell me whether that 32-year-old is ready to handle that half million dollar gift that people sometimes consider.
You know, and money, of course, tends to magnify behavior. Whatever you do with less money, you'll do probably more of with more money. If you've got a responsible child who's saving, working, making good decisions, that gift might accelerate a down payment, maybe an education, investment, or maybe a business opportunity they're considering. On the other hand, if you've got somebody who spends every dollar they make, and then handing them a giant check really doesn't solve the problem. Probably just makes it worse. So, sometimes, the best gift you can give them isn't more money, it's more structure around the money. Help them understand how you built what you built, how you got where you are, and what it could mean for them if they can get some guidelines in their own lives for those people who are a little more challenged understanding how the money works. So, another mistake here Bob's going to tell us about is very similar. Bob, tell us about what happens when we pay for everything for our family.
Bob: Well, you know, mom and dad become the family ATM. They pay for all the vacations, the cars, the private school, the grandkids college, club memberships. I mean, in an extreme, hell, I'm not buying my kids a club membership, but maybe part of the mortgage, and individually, every check feels manageable. I want to go back to what you were talking about before because, you know, my wife and I are starting to live through this right now, Brian. Our kids and their spouses, they're all in their, you know, mid 20s to early 30s. And, you know, if you think parenting comes to an end, it just doesn't. Just the decisions come with bigger dollar amounts.
And, you know, what I always tell my kids is, "Hey, play stupid games, you win stupid prizes, and those prizes come with bigger dollar amounts attached to it." And I agree with what you said at the outset of the segment. The most important thing here is to, hopefully, equip your kids how to be responsible on their own. And I'm just telling you as a father, if I can see that that's happening, if they're living within their budget, if they're handling money wisely and all that, and we could come along and do something small to help really take some of the stress off, if they are being responsible with money, I feel a whole lot better about that than, you know, just bailing people out from a stupid emergency that they created.
I'm really not down for that. My wife and I are not down for that. Sometimes you got to, you know, get into a triage situation. But, yeah, it's all about, you know, blending. And there's no science to it. You just got to work through it. It's blending, helping them get responsible with, you know, treating them, hopefully, fairly. And fair doesn't have to be equal, all of that. It's definitely more of an art than a science. I know you're going through this with some of your kids as well, Brian. What are your thoughts on that? And more importantly, what are you seeing clients work through when you meet with them in the office?
Brian: Yeah, I see, you know, if money is given without some kind of structure, without some kind of, "Here's why I'm doing this to you and here's what I expect you to do with it. Here's the outcome I expect." Not necessarily, "Here's exactly how I want you to spend it," but, "Here's how I want your life to change, improve, whatever, because I've given you this. You figure out how to get there. But this is why I'm giving it to you, because I have this goal for you." If gifts are made without that in mind, then that can be an absolute mess because one side has expectations that the other side, maybe in a best case scenario, simply, innocently isn't aware of, or worst case scenario, is aware of and just plain doesn't care. And that's not going to end very well. But, yeah, so...
Bob: Brian, the behavior really never changes. Whether somebody's 16, 36 or 66, we all kind of behave the same way. We like nice things. We like life to be easy. And my point is, you know, the mistakes we all make at age 16 are no different. They just come with a lot bigger dollar signs attached to it when you're 36, 46, or 56. That's really the point I'm trying to make. So, you know, equipping people to handle money appropriately and correctly is really what we want to accomplish here.
Brian: That's absolutely right. You know, so let's talk about, you know, the third mistake that might come up here is trying to be equal instead of being fair. So, this is dangerous territory. Now you got three kids. One is a doctor making half a million dollars a year. One's a teacher with a solid pension well off into the future. Three kids, though, obviously, a little less income than their doctor sibling. The third maybe has a disability or some other circumstance requiring additional support. So, how do you deal with this? Do you give each kid exactly the same amount?
And again, remember what we're talking about here? We're not talking about ongoing support. We're simply talking about, you know, "I've got more than I need and I want to see my kids benefit from it right now." Well, you may have been helping one of these kids all along. So, how do you deal with the fairness issue here? There's no perfect answer. I mean, these folks are, let's say, 48 years old and can still tell you exactly who got the nicer Christmas present in 1987. Some people score out there.
Bob: Yep, they remember.
Brian: You don't owe anybody anything. But if you're making substantially unequal gifts, then you're going to create some kind of issue down the road. So, make sure you explain it and you maybe even put it in writing. Otherwise, without that, they're going to make their own explanation after you're gone.
Bob: And the same thing applies to those, "loans" to kids, family vacation homes that nobody wants, all that kind of stuff. Here's the Allworth advice, don't just prepare your wealth for your children, prepare your children for the wealth, and communicate your intentions before money has a chance to create unnecessary family problems. Well, if retirement means a big drop in your income, could that actually create a smart window to intentionally realize capital gains? It's one of your questions we'll answer next. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Do you have a financial question you'd like for us to answer? If so, there's a red button you can click while you're listening to the show if you're listening on the iHeart app. Simply record your question there, and it will come straight to us. Paul in Anderson leads us off tonight, Brian. He says, "I'm planning to retire in the next couple of years, and my income should drop quite a bit. Should I be intentionally realizing capital gains once I retire. And I'm in a lower tax bracket?"
Brian: Yeah, I think this is not a bad idea. So often, it does make sense to deliberately realize some of these long-term capital gains after retirement. Remember, for those you might not be familiar, we're not talking about 401(k) IRA. We're talking about a taxable account, you know, something that spits out of 1099 every year with dividends and interest and whatever. You know, so what we're talking about is purposely selling something and incurring that gain. Think of this time as a gain-harvesting window. Your wages are down, but that portfolio may still be producing dividends, interest, embedded gains.
And one thing I'll throw out there, if you're in a situation where you can truly not have any taxable income, then it's possible you realize up to, you know, say, $98,000 and still land in the 0% federal, long-term capital gains bracket. Yes, that's what I said. If you literally have no income, you know, no pension, no Social Security, you're not working at all, perfect scenario here, you could recognize almost $99,000 worth of capital gains and be in that 0% long-term bracket. That is possible out there. So, you know, what you want to be thinking about here is that it doesn't necessarily mean sell everything. These gains stack on top of other taxable income, assuming you're not one of these rare people who can truly eliminate all of it.
And some other things to keep in mind, too, is these gains can make more of your Social Security taxable if it pushes you over a certain amount. And if you're buying health insurance through the Affordable Care Act, you know, the before Medicare, then gains can reduce those premium subsidies that are even out there for those that remain. So, in any case, lots of moving parts to it, but there are opportunities to be had to consider going ahead and taking some of these capital gains here. And again, you're also freeing up dollars that you could spend on goals that you determined a long time ago. A lot of people convince themselves that there's taxes involved here. That means I simply can't sell any of these assets. Well, if that's really the case, then I can't consider them part of your financial support for your financial plan.
Don't let the tax tail wag the dog. Taxes are coming due one way or another. Just understand what the impact is and plan for it. Treat it like another necessary outflow, just like the goals that you have. Yeah, there's taxes that are going to come along with it. That's all math that can be done in advance. It's not something to be afraid of. Dave and Mary in Tampa, Florida, podcast listeners outside the reach of our antennas here locally in Cincinnati. Appreciate that. Dave and Mary say they're financially independent and they think they won't spend everything they have. We've heard this one before. "Should we be investing differently if a meaningful part of the portfolio is really for our kids rather than for us?" How do you handle that, Bob?
Bob: Well, I would say possibly. First of all, make sure you stress test, Dave and Mary, your personal financial plan for all the things that could go wrong. I don't say that to scare you. You just want to make sure that we really build that financial plan to make sure it takes care of the two of you and with a lot of wiggle room involved. If the answer is still, "yep, we're not going to need a sizable amount of money." If your personal investment risk tolerance tolerates that, you certainly, from a tax standpoint, want to try to move from the ordinary income ledger to the capital gains ledger. Meaning, invest more for growth in your taxable accounts. Possibly do aggressive Roth conversions where your heirs would pay no taxes.
We see this from time to time. Couples are more than willing to pay some of the taxes right now in a low tax bracket to take care of that tax burden for their kids. So, there's certainly things that you could do, both by getting to the capital gains side of the ledger, being more growth oriented, and possibly, never have anybody pay any taxes because of the stepped up basis for capital gains assets. So, certainly something to talk about with your advisor, but again, make sure your plan is going to float in any scenario that might come down the road. Hope that helps. We've got time for one more. Jim in Montgomery says, "How much weight should we put on future tax law changes when making decisions today? I don't want to avoid a good strategy just because Congress might change something, but I also don't want our whole plan depending on one tax rule, staying around forever." Brian?
Brian: Yeah, this is an interesting question. There's an interesting viewpoint in here, which is, I realize that there's a loophole or some kind of opportunity or whatever, but loopholes get closed, things go away. I kind of think back to when backdoor Roth conversions were very, very first a thing. The IRS put income limits on what you could do on whether you could make a contribution directly to a Roth. But then there were different rules around converting a non-deductible IRA. And it was a loophole for a long time until the IRS finally said, "You know what? This is cool. Go ahead and do it." Which is totally stupid, but anyway, they should just allow it. Anyhow, that's not the question that was asked, but that reminds me what this is. People were super hesitant to mess around with those backdoor conversions because of that.
So, the good financial plan starts with today's law. That's the only rule book you can actually use. And then pressure test against reasonable alternatives. What if tax rates are higher later? What if they're lower? What if the estate tax exemption changes, right? That's changed enormously over the last decades of most people's accumulation years. What if capital gains rates go up, if they go down, whatever. If your plan works across all of these, now you've built something durable and you can focus on the efficiency of whatever all these options are. But remember, start with the laws the way they're on the books right now. Don't make new things up. And again, if it's written in stone right now, currently in law, doesn't mean it can't change, but it takes an awful lot for that to happen. So, be open to taking a little bit of, "risk" that something might change.
Bob: Coming up next, something we want some of you to perhaps stop doing right now. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Well, if checking your investment accounts has become part of your morning routine right alongside drinking your coffee, checking the weather, reading the newspaper, if newspapers are still a thing, you may be doing more harm than good, Brian. What are we talking about here?
Brian: So, you know, checking doesn't actually give you more control, right? If I'm trying to grow a vegetable garden, it's not going to help if I go pull everything up by the roots once a week to see how it looks. Just giving me more opportunities to react to whatever's happening, even though there's probably very little I can do in the exact moment in time. So, you know, if I see my portfolio is down $70,000 before lunch and I think, "Oh, my gosh, should I sell something? Should I move some money to cash? Is this the beginning of the end? Is this something bigger down on the horizon here?" The real question should actually be, "Has anything about my long-term financial plan actually changed since yesterday?"
Stuff goes up and down. A lot of times that $70,000, people will always tell me, they tell me how many dollars they lost in 2008. Everybody likes to go back to that. And they talk about the dollars. They don't talk about the percentages. And a lot of people who had a decently diversified portfolio absolutely lost a chunk of money, but it wasn't as bad as what the market was. And frankly, it didn't hurt them in the long run anyway. It hurt in the short run for sure. Stuff happens. But it doesn't hurt in the long run as long as we don't get ourselves into trouble.
So, right, you spend 30 or 40 years building this pile of money. You feel responsible for protecting it. That's completely understandable. This didn't get created overnight. I have to protect it. This is something that took my lifetime to build. We want to watch out for it, but monitoring that portfolio isn't the same as managing your portfolio. So, a good portfolio management, well, that just means making changes for a reason. And that reason shouldn't be because something happened 10 minutes ago. Maybe your goals changed, your risk tolerance changed. Maybe it's just time for rebalancing and nothing has changed. Or tax loss harvesting, you've just learned about that. Those are all good reasons to make some changes. Right, Bob?
Bob: Yeah. And I think, you know, for the people that get nervous about market volatility, you know, at least from my experience, this is less about the long-term financial plan and more about just getting glued to some of the headlines and people thinking, "You know what? I know I should think long-term. I know my plan's good," yada, yada, yada. But "this time it's different," pops in. And people want to solve all the problems in the world or think these problems have never happened before. And I think that's where taking people through, you know, during a review meeting, some actual historical events that have happened over the last 60, 70, 80 years in the market. Once people can actually see that things like this have happened before, even if it doesn't feel like it, they're able to walk away not quite worried as much about some of the recent headlines, even though the media exists to make us think this time is different and you better do something because the sky is falling. That's my perspective on it.
Brian: I think that's a great perspective and that's something that comes up regularly. We're all human beings and that's how we react to it.
Bob: Here's the Allworth advice, measure your financial progress in years, not afternoons. The more often you watch your portfolio move, the more opportunities you give your emotions to interfere with a good, long-term plan. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
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