Castle Wealth Group

September 21, 2020

The New Paradigm of Retirement

There is an old paradigm of retirement where you defer tax payment as long as possible until you find out that you pay more in taxes with this approach. This may be resonating with you right now if you are in the higher tax bracket. A proper tax planning report can help to show you the macro view of minimizing taxes in your lifetime.

Retirement is different for everyone and the strategy to distribute these accumulated assets is specific. Let’s look at different topics as we look at this and possibly consider it with a new paradigm shift. I will share with you how to anticipate the future of taxes, what tools you can use, and how to plan your asset distribution appropriately towards your retirement. 

In this episode, you’ll learn…

• Chris’ positive focus for the week
• Difference between old paradigm and new paradigm in retirement
• Tax Risk and how Taxes are going up in the future
• Retirement planning
• Tax Cut and Jobs Act
• Preserving and distributing assets
• What is the Sequence of Return Risk
• Distribution of accumulated wealth
• The basics of income gap
• 60/40 portfolio mix may not be the best option now
• Tax buckets and which account you can draw as you are moving into retirement
• Why you need to compute your Fortified Income Score to close the income gap
• Where taxes are going in the future and how you can manage taxes

Links and Resources:

• contact@castlewealthgroup.com
• castlewealthlegal.com
• RetirementPlanWebinar.com
• AlzElderCare.com
• castlewealthgroup.com
• TheChrisBerryShow.com
• Michiganestateplanning.com

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Episode Transcript:

This is the Chris Berry Show. Expert information on wealth, estate and tax planning for the second half of life, information that you can understand. Here’s your host, Chris Berry.

Welcome to the show. This is Chris Berry, of course, since this is my show. And we’re going to start this week off with a positive focus, just like we do every week. And a positive focus is just something positive that’s happened within the past week. I think this is especially important, given all the craziness in the world right now.

So, my positive focus will be my family, my children, specifically. My son, Ryan, who’s now 10 and my daughter, Madison, aged seven, where they went back to school. And with all the adjustments and everything going on, they’re handling it very well. They were very excited to do some in-person schooling versus the Zoom’s and virtual schooling.

So right now they’re doing four days on, Monday through Thursday, and then Friday is our virtual day. Then reconnecting with our kids and following all the social distance, it’s just amazing how resilient children can be. That brings me some joy in this crazy, crazy world that we’re dealing with.

Now, what we’re going to do on the show today is, we’re going to focus on the changing world of retirement and legacy planning. And understand that our parents’ retirement is going to look different than our retirement, just because the world’s changed. And I’m not just talking about the pandemic, I’m talking about things that have been happening over the last five, 10 years. And we’re going to talk about the old paradigm versus the new paradigm.

So, the old paradigm is the way that your parents retired. And approaching retirement like your parents approached it, might not yield the best results. And we need to look at the old retirement rules or the old retirement paradigm versus the new retirement paradigm to make sure that you’re better prepared to get the most out of your retirement years and make sure that you leave the legacy you want to the next generation.

So, your parents’ retirement may have looked something like the following. They might’ve worked for the same company, their whole career. They might’ve retired at age 65 and then received a large pension, that pension covered many of the lifestyle expenses. And then upon that pension, they also received Social Security, which could provide some supplemental income. So, the pension was to cover the paychecks that you lost in retirement and Social Security would have been the play checks.

And really what it did is it put less of an emphasis on managing your own investments and more of an emphasis on your employer, basically taking care of things for you. Now, our world is different and as you’re moving into retirement, understand it’s a different world out there. Your parents wouldn’t recognize the world of retirement planning into which most retirees now venturing. How do you try to course in this changing world of retirement planning?

Retirees of these days need to plan more than ever, and your retirement will likely look much different than your parents. Here’s a couple of reasons why. Well, now the average person works for seven different companies throughout their career, that’s very different. For example, my father, he was a professor for, I think 47 years, all at the same community college. He was a professor, an associate dean and a basketball coach at Oakland Community College for 47 years.

And many of his other colleagues and teachers were there that whole time as well. Versus now people jump around from different positions, different jobs, and sometimes even different careers. Also, for many individuals, the 401(k) replaced the pension. So, what I see when we are doing a lot of our in person workshops, I’d ask people to raise their hand and say, “Who here has a pension moving into retirement?” And probably when I started my career, about 15 years ago, three-quarters of the room would raise their hands.

Then it dropped down to about a half, now prior to the pandemic, maybe a quarter of the room would raise their hand to say that they had a pension. And what I find is a lot of those that do have pensions end up doing a lump sum buyout for a variety of reasons. A lot of it is they don’t have faith in the current company. A lot of it involves that they want to take it to the private marketplace, to see what they can get in terms of kind of rebuilding that pension or recreating it with an annuity or even just taking more control.

Because, if you do take that straight pension, especially if you take the straight life pension, if you pass away all that money has gone versus if you’re like take the lump sum buyout you have more control. So, again, for many individuals, the 401(k) is replacing that pension, for many now retirement is self-funded.

So, in the past you worked for a company for 40 years. I actually had a conversation last week, individual worked for Ford for 45 years and had a very good pension because of it. We don’t see that as much anymore. And Social Security may cover very little of the lifestyle requirements. For many people now, Social Security is kind of the bedrock of their retirement income stream which is kind of scary. And we’ll talk about why that is given some of the concerns that we have for Social Security.

And, another reason is some may never fully retire, but choose to stay engaged to some level. So, I have a lot of conversations where people, they don’t fully retire, they just kind of slow down or maybe even transition to other professions. I was working with an individual he was an engineer for many years and then transitioned and in retirement became a part time nurse just to do something completely different.

So, understand that retirement for your parents looks very different what retirement might look like for you. And with that, we need to take a look at some very specific topics as it relates to this. And probably one of the biggest concerns, and we’ve talked about it previously on the show, but I think it really is one of the biggest risks right now. And one of the biggest differences between the old and the new paradigm of retirement is tax rate risk. So in the past, the idea has always been defer, defer, defer paying taxes as long as possible. That’s the old paradigm.

The idea is that we defer paying taxes because in retirement we’re going to be in a lower tax bracket. But, what a lot of people retiring these days find out is that they’re in the same, if not higher tax bracket in retirement. You might be asking, well, why is that? Well, I think the way that the government has set up the tax code, and they actually wanted us to defer paying taxes as long as possible.

Because when you defer paying taxes, you pay more in taxes because, you like this idea of growing a pretax bigger amount of cash, but understands with that bigger amount of cash that you’re growing, you’re also building a bigger tax burden, a bigger tax stat, a bigger tax bill that has to be paid off. And I can run the numbers to prove this to you, but understand the more you defer paying taxes, the larger your tax bill will be.

And so, the government kind of set us up for that. But what happened is that, the government took on a lot of debts with the idea that they’re going to receive this larger tax bill in the future, but they ran up so much debt, it’s almost like they’re going to go bankrupt. And that’s why we have so many of these tax law changes we’ve had the last two years. Well, with the SECURE Act and the CARES Act, government realizes that they’re kind of running out of money and they have to start calling the debt, calling that tax debt.

So, the old paradigm and what your parents did is, they deferred any, if they did have a 401(k), they deferred paying taxes with the assumption that in retirement, they’re going to be in a lower tax bracket. And maybe you’re listening to this, and this is resonating with you right now. Maybe you’re retired and you’re like, “Yeah, I’m in the same, if not higher tax bracket now.” Because, you deferred, deferred, deferred with idea that you are going to be in a lower tax bracket in retirement. But, what a lot of people found is, one of the things they lose is a lot of the common deductions they had while they were working.

And there’s four main deductions that typically you have while you’re working, that you lose as you move into retirement. And the first are those is children. So, dependence. So, raise your hand if you think you’re going to have more kids in retirement, most people won’t. Right? So you lose the dependence. Most people have paid off their mortgage in retirement, so they can’t count on that as a deduction. “We want to pay off our house.”

And that may or may not be a good idea. I actually had this conversation last week with an individual and we’re running the numbers with this amazingly low interest rate environment that we have right now, refinancing is happening all the time. And they had a refi rate of about 2.75%. And they’re deciding, “Do I pay off this mortgage? Or do I look at putting that money into the market?”

There’s pros and cons to each, and we can actually go over that if you wanted to. But mortgage deductions, typically we lose those as we move into retirement, contributions to 401(k)s IRAs, we lose that as we move into retirement. And then the fourth thing is charitable deductions. Not to say that we’re not donating to charity, it’s typically in retirement we donate our time, not our money in retirement.

And so, because we lose a lot of those common deductions, all of a sudden we might be in the similar, if not higher tax bracket in retirement. And then also understand that what happens when you turn 70 and a half, which is now 72, thanks to the SECURE Act. Well, now you have to take out a required minimum distributions. So are those taxed? The answer is yes. And then what happens at least by age 70? Where we’ve claimed Social Security, is that taxed? Potentially. And we’ll talk about that, but chances are that will be taxed now.

So now we have the RMDs, we have our Social Security. If we have a pension, is that taxed? Yes, that’s taxed and all that, these things are taxed at ordinary income tax. So, maybe we have a pension, maybe we do have Social Security. Maybe we have required minimum distributions coming out. So we have this more income than maybe we thought, or we planned that’s going to be taxed. And then on top of that, we lose those deductions on the bottom end.

So because of this, a lot of times I find my clients are in similar, if not higher tax bracket in retirement. Many of my clients have around $100,000 worth of income that puts them in the middle of the 22% tax bracket. And there might’ve been a little bit higher while they’re working, but still a lot of times they’re in the same tax bracket, that 22% tax bracket.

So, the idea here is that, if we’re going to be there the same tax bracket or have the same amount of… Oh, and here’s the other thing, is the old paradigm is that once you retired, your expenses went down. But what I find in this new paradigm is a lot of baby boomers when they retire, now they want to start traveling. Especially the first couple of years of retirement, we call those the Go-Go years. Where, “Okay, now we’ve retired. Now we’re going to spend our money. Now we’re going to travel. We’re going to buy that RV that we wanted to do. We’re going to fix up the house.”

And so, in the past the old paradigm, “Yeah, we kind of slow down and we just hang out at home.” But now it seems like with the baby boomers their income needs are the same, or maybe 80% of what it was while they’re working. And so, they need to draw on those assets. And maybe they’re taking out more than those RMDs and retirement. So again, we have to look at the old paradigm versus the new paradigm and the rules that we had in the past may not apply moving forward.

And probably the biggest issue with this is again, the tax risk. Is that, okay, given this concept that we’re going to be at the same income level may be in retirement or pretty darn close, does it make sense to continue to defer, defer, defer, defer paying taxes? Does it continue to put money into those 401(k)s, those IRAs? Should we be over-funding those accounts? And the answer is probably not. Because guess what? Let me ask you this question.

Do you think taxes are going to go up or down in the future? Well, just like baby boomers where spending in retirement and looking to travel, so is our government they’ve been spending and not to get political, but both sides have been spending. It’s just that they’re spending on different things. And right now coming into 2020, we had a $23 trillion deficit. So, a lot of people thought taxes had to go up in the future. And then, with the pandemic and everything we’ve had in 2020, we had the CARES Act passed in March.

And what the CARES Act did is add another $2.2 trillion to our $23 trillion deficit. So now we’re $25 trillion in debt plus, chances are, we’re going to have another CARES Act a sequel because the first one, apparently wasn’t good enough. Now we’re going to have a sequel, which is going to add another depending, potentially one to $3 trillion to the debt. So the question, do you think taxes are going to go up or down in the future?

And then also add into the fact we have the Tax Cuts and Jobs Act that was passed in 2018, and lasts from 2018 to 2025. And what the Tax Cuts and Jobs Act says, is that marginal tax rates from now until 2025 are going to be three to 4% lower across the board. So right now, if you’re at the 22% tax bracket, understand that in 2025, that’s going to be a 25% tax bracket. So just by paying the taxes sooner, rather than later, you’re going to save about three to 4% on your taxes.

Now, understand we’re not guaranteed that the Tax Cuts and Jobs Act will last till 2025, because remember, we’re in an election year. What happens if the other side gets an office? Do you think they’re going to maintain the Trump Tax Cuts and Jobs Act law? Chances are they probably won’t. And so with that, understand that while we have this window of opportunity from now till 2025 to pay taxes at a lower rate, that window may be closing sooner than 2025.

And so, this is the first thing you need to think about as it relates to this old versus new paradigm of retirement planning, the changing world of retirement planning, the retirement strategies that your parents use may not work for you, or be ideal for you now. And the first reason for that is, again, this tax rate risk.

And so, if you want some help analyzing this, one of the things that we can do is we can run a tax planning report for you. And understand we’re looking at tax planning, not through a micro lens of minimizing taxes in one year, but through a macro lens of minimizing taxes over your lifetime. So if you’re interested in that, give our office a call at (844) 885-4200. Again, (844) 885-4200.

And what we can do is, with a previous tax return, we can run a tax planning reports. And what this will show you, is where you’re at in your current tax bracket and show some different scenarios in terms of minimizing taxes, not just in one year, but over your lifetime. So for the rest of your retirement, as well as what you leave to the next generation. And all you have to do is give our office a call at (844) 885-4200 and ask for that tax planning report to get started.

And again, all we’ll need is your last tax return, ask you a couple of questions, and then we can provide that to you. And that’s free to any listeners of the show. Just give our office a call at (844) 885-4200. Ask for a tax planning report where we’ll schedule a short 15 minute conversation talking about that, and we’ll go ahead and get started on that. Or you can email us at chris@castlewealthgroup.com. Stick with us as we continue the conversation.

Hi, Madison and Ryan Berry.

Our dad is Chris Berry from the Castle Wealth Group.

The Castle Wealth Group used to be the Eldercare Firm, but dad wanted to the company to be broader in its scope of services.

To not only protect and preserve assets, but to help people grow their assets, to prepare for retirement.

As a certified Elder Law Attorney and fiduciary financial advisor, our dad and his team at Castle Wealth Group can help you with lots of important things.

To tell you more, here’s our dad, Chris Berry.

Thanks Maddie and Ryan. Here at the Castle Wealth Group. We can help you put together an estate plan to avoid probate, work with you on a tax plan to keep more money for your family, and less for Uncle Sam and protect you against the devastating cost of long-term care. Our team is here for your family. I invite you to learn more about the Castle Wealth Group at our next free workshop, where you will learn the three steps to create a legal, financial and tax plan for the second of life. Call us today to register at (844) 885-4200.

The Castle Wealth Group, formerly the Eldercare Firm.

Learn more at thecastlewealthgroup.com today.

So we’re talking about the old versus the new paradigm. So the old paradigm is your parents’ retirement. And for your parents, typically they work for the same company their whole career, they retired at age 65, received a pension that was going to really fund a lot of their needs and expenses in retirement, relied on Social Security, but really it was supplemental income. It was the play money versus the money used to cover their expenses. And really, there was more emphasis on the employer taking care of the employee’s retirement, a son’s typically the person who worked for the same company, maybe their whole career, versus now the average person works for seven different companies during their career.

A lot of times there is no pension, or if there is a pension, they took a lump sum buyout, and for many retirement is mostly self-funded meaning you need to plan out your own retirement or with the help of a professional, hint, hint. And Social Security may cover a little of lifestyle requirements, even though people are depending on Social Security more than ever, and some may never fully retire in the first place.

And so, previously we talked about what I think is really the number one risk facing retirees these days, and that’s tax risk. Now, what we’re going to do is talk about the old versus new paradigm as it relates to retirement distribution planning. So, think about retirement like this. It’s kind of like climbing a mountain. You’ve worked your whole life. You’ve climbed to the top of the mountain. You take a big deep breath, sigh relief, [inaudible 00:19:38] but then you realize you need to get back down the mountain.

And don’t quote me on this, but I saw a stat. But most people that climb Mount Everest, who end up passing away, they don’t pass away on the way up, they actually pass away on the way back down. So, understand that as you move into retirement, you’re moving into a different phase in life. You’re moving from the accumulation phase where it’s all about accumulating wealth. It’s now the preservation and distribution phase, where now it’s all about preserving and distributing those assets in retirement and for your legacy.

And so, the old paradigm, it was all about relying on what we call the three legged stool. You would have a pension, you would have Social Security and maybe have some investments to cover any gap if there was a little bit of a gap. But, really, what we saw in the past is people would just basically rely on their pension that would cover their living expenses and then Social Security that would be kind of their fund money or play money.

And then if they needed to, they could tap into some of their investments, but really that was left to the next generation. Versus, now if you look at that three legged stool, well, carve out that pension stole or pension leg, because even if you do have a pension, I’d say three quarters of the people we work with end up lump summing that out taking that buyout and then Social Security… well, maybe we cut that leg in half, because, understand that Social Security, there’s some writing on the wall, not to say Social Security, won’t be there, but there’s some problems with Social Security.

Where if you look at your Social Security statement, I think the latest one said that less changes are made. They’re only going to be able to pay out 74 cents on the dollar by 2034. So, kind of carved that leg up a little bit.

And so really, the one leg that we have to depend on is going to be your accumulated savings. So, we need to understand how to structure that, how to be able to use that. So the strategies you use to accumulate all that wealth is going to be different than the strategies we use to preserve that. And so really for the modern retiree, this is that new paradigm, one of the big risks. So, if tax risk is number one, very close second would be what I call sequence of return risk.

And this kind of fits into market risk to a certain extent. And the idea here is that, all right, so in the old paradigm for our parents, they didn’t really have to draw on their assets in retirement. They could just rely on their pension, Social Security, and then maybe supplement it a little bit with a drawing on assets. But for majority of retirees moving forward, the number one leg they’re going to have to rely on is, the distribution of their accumulated wealth.

So, the idea is you accumulate, accumulate, accumulate, and then as you move into retirement, now we need to start drawing down those assets. Very different than the old style of just relying on that pension. But now, a lot of retirees have what we call an income gap. So, if let’s say you have $1,000 or $100,000 worth of expenses per year in retirement, and that’s covering your living expenses, your travel, whatever you want to do, and you only have a Social Security combined, that’s covering say 60,000 or 50,000, then you have an income gap of $50,000. And so, what you’re going to have to do is draw on your assets to the tune of $50,000 a year.

Now, there’s different strategies on how to do this. And one of those strategies, and this is a little bit of that old paradigm, is to rely on the 4% rule. The idea that well, if as long as you take out 4% of your investments and you just rely on the dividends and everything like that, you’re going to be okay. Well, unfortunately, we have what’s called sequence of return risk. And this really could be the dagger in the heart of the 4% rule.

And what sequences of return risk says is that, if we’re drawing assets out, as the market’s going down early in our retirement, it can have a devastating effect on our retirement. I know you’re listening to me right now, but, when I’m sitting next to clients, I have a handy graph to show them, and I can send this to you. If you’re interested in this. Is simple, a front and back description showing exactly the effect sequence of return risks can have on your retirement. All you have to do is just email our office at contact@castlewealthgroup.com, put the subject line sequence returned, and I’ll email this out to you.

But what it shows you is that if we have a situation where an individual has $100,000 accounts, and we have Mr. Lucky and Miss Unlucky, and the only thing we do is we switch the sequence of returns. So, assume a 6% rate of return because that’s what we’ve been beaten into our head. And that fits into that 4% concept, right? As long as we just pull out 4% a year, we’re going to be okay in the markets over time, give us 6%. That’s kind of the guidelines. That’s that old paradigm, right?

Well, the problem with that is if we have a big downturn in the beginning, think a 2008, 2002, March 2020 now we did have a comeback, but if you look at employment and everything, we might have another debt. But if we have a big downturn, right in that beginning, it can have a dramatic effect on retirement, and I can send you this graph, it’s about a 60% less money if we have the downturn in the beginning versus the end of our retirement.

And this is especially true when we’re drawing assets out. So while we’re accumulating wealth, it doesn’t matter. Or if we don’t have an income gap, it really does doesn’t matter. But if we are drawing on our assets in retirement, so if we do have a monthly or annual income gap where you’re having to pull money out of those 401(k)s, IRAs, out of those accounts, to cover that income gap, and we have a downturn in the market early in your retirement, it can have a dramatic and devastating effect on your nest egg.

And so, if tax risk is the number one concern right now for retirees, I would say if that’s one A, one B is market volatility and sequence of return risk. And this is a hidden one. It’s hard to understand unless you’ve thought it through, but understand that if you’re drawing on your money, it’s not going to have time to make a comeback. While you’re working, if there’s a downturn, you could wait it out. But if there’s a downturn now, as you’re within five years of retirement, or if you’re retired now, you might not be able to make it back.

And so, that’s why we have certain strategies try to protect against the sequence of return risk. And this is really the dagger in the heart of that 4% rule. That 4% rule makes a lot of sense in the old paradigm, when we’re in a 12 year bull market. And yeah, we could basically just assume that the market’s going to go up 6% a year, at least over time. And I’m not saying it won’t, but understand that when you’re in a 12 year bull run everything is pretty darn easy.

I like to sit down with people and say, “Oh yeah, we’ve been doing good. My stockbroker, whatever, he’s been doing good for me last couple of years, or last 10 years.” I’m like, “Well, that’s great. Everyone has. You can basically throw a dart at a dartboard. The market’s been going up last 12 years. But, in March we had our first gut punch of, okay, what happens with the market’s declined 30%? How are you going to feel?”

And that’s where as you get near retirement, we need to look at strategies to help insulate you from sequence of return risk. It may be relying on that old paradigm of the 4% rule of just relying on income created from dividends, or just withdrawing up to 4% of my principal, because the market’s going up 6%, I’m going to be okay. Well, maybe we shouldn’t entirely depend on the market. Okay.

Again, we’re not talking about any specific tools, the way that we work with clients, we first figure out what are your goals? Figure out the best strategies to help you achieve those goals, and then pick the right tools at that time. And so, maybe, and I’m not saying it’s not, but I’m just suggesting that maybe we should look at other strategies other than for distribution, just relying on that 4% rule. Because again, there’s no guarantees that the market’s going to go up 6% a year. And so if the market’s going up 6% year withdrawing 4%, yeah, you’re going to be okay.

But, what if the market goes down 30% and doesn’t bounce back right away? Are you going to be in the same position? Maybe it’s time to look at insulating yourself from that sequence of return risk. And if that’s something you’re concerned about as a market downturn, as you’re moving into retirement, give our office a call at (844) 885-4200. Again, (844) 885-4200. And what this is really getting to is, the first two areas that we focus on as a firm, as it relates to putting together a fortified, retirement and legacy plan.

We’re talking about income planning and investment planning. And really, the bedrock of retirement is having a plan for income in retirement. And maybe it is that 4% rule of you’re going to take out 4% a year, and you’re just going to hope that the market’s going to give you even 6% a year. Or, we can put together a strategy that maybe will give you some more confidence, more peace of mind, where you’re not super concerned about what the market’s going to do. And we have a variety of different strategies to do this.

So, we’re not tied to using any specific tool we’re completely independent. We first figure out what is your goal? And maybe it is an income plan in retirement that allows you to sleep easy at night. And then we can talk about different strategies to help you do that. Maybe it’s our bucket plan strategy of mapping out that we’re going to have a now bucket of money, so money over the next year. We’re going to have a later bucket of money, and money that’s geared towards growth.

And then we’re going to have a soon bucket that’s going to maybe be invested more conservatively. Or maybe we look at some tools that guarantee based on the guarantees of the company, that you won’t lose any money and you can participate in at least a portion of the growth. So again, we’re completely independent. We have different strategies based on what your goals are, and we can use any tool in the investment world.

And so, if you’re concerned about moving into retirement and that sequence of return risk and the market going down right as you’re about to retire, give our office a call at (844) 885-4200, and we can develop an income and investment plan. We can map out how your income is going to work in retirement, how we’re going to rely on Social Security, should we take it right away? Should we delay taking your Social Security? That’s a conversation in itself. And then look at your investments. How should we be looking at our investment? How much risk are we willing to take on? Do we want our money in equities? Do we want our money in bonds?

Well, I was having a conversation the other day with some clients and that old paradigm is the 60, 40 portfolio. 60% in stocks, 40% in bonds. So, 60% in equities, 40% in bonds. And I was reading a Forbes article and I’ve, I think, tweeted it out or put it on out Facebook page. There’s an interesting Forbes article that said the 60, 40 portfolio may be dead because of the low interest rates on bonds. Bonds are really underperforming right now. So, maybe now’s the time to look to the bond alternatives.

So, everyone’s so happy about the interest rates being so low, so they can do all these refinancing, but understand that’s also affecting the bond market. That’s one of the things where that 60, 40 mix in your portfolio, might not be the best mix anymore because you’re 40% and the bonds are severely underperforming. And that’s where we can look to some other alternatives for that 40%.

Maybe we still have 60% in equities, but maybe that 40% instead of bonds, we look at some other tools that offer guarantees meaning that you’re not going to lose your money, but you can still participate in the growth to a certain extent. And we have some different tools available there. So again, that’s that old paradigm versus the new paradigm. The idea was you just throw your money into a target fund and slowly it goes from 80, 20, 80 is equities, 20 is bonds to 60 equities, 40 bonds, it’s maybe a 50, 50 mix as you get older, maybe you have more in bonds and equities.

Well, that was great when interest rates were higher, but now with bonds, almost should have your money just sitting and checking your savings. You’re getting about the similar rate of return. So again, this concept of the old paradigm versus the new paradigm. If sequence of return risk is a concern, give our office a call at (844) 885-4200. If you want me to send you that short two page front and back illustration of why sequence returns should be a concern. Just email us at contact@castlewealthgroup.com, and I’ll email over that diagram for you. Stick with us as we continue this conversation.

Hi. Madison and Ryan Berry here from the Castle Wealth Group, formerly the Eldercare Firm.

Our dad is Chris Berry.

He’s an attorney and fiduciary financial advisor, which means he helps families plan, protect and preserve their assets.

The entire team at the Castle Wealth Group can help you with lots of important things. To tell you more, here’s our dad, Chris Berry.

Thanks, Maddie and Ryan. Here at the Castle Wealth Group, we can help you put together an estate plan to avoid probate, work with you on a tax plan to keep more money for your family, and less for Uncle Sam and protect you against the devastating cost of long-term care.

Our team is here for your family. I invite you to learn more about the Castle Wealth Group at our next free workshop, where you will learn the three steps to create a legal, financial and tax plan for the second half of life. Call us today to register at (844) 885-4200, (844) 885-4200. Or visit us at castlewealthgroup.com

The Castle Wealth Group, formerly the Eldercare Firm.

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So we’re talking about the old paradigm versus the new paradigm. The old paradigm of retirement, if you remember working is the same company, your whole career, my father was a professor at the same community college for 47 years. A lot of people retire at 65 and receive a pension. The pension covers most of the lifestyle expenses, and then relying upon Social Security for supplemental income, that play money.

And again, it’s really putting less emphasis on your own personal responsibility of managing your retirement and more emphasis on the employer, taking care of your retirement for you. Now, the new paradigm, and this is for people, baby boomers, looking to retire now, or in the future, average person now works for seven different companies during their career, 401(k) replaces a pension for many people, retirement is mostly self-funded, meaning it’s all about how much you’ve accumulated, how much you’ve saved.

Social Security may cover very little of lifestyle requirements, a lot of baby boomers, instead of really cutting back in retirement, which was the old paradigm, now, a lot of people are spending the same amount or needing the same amount of expenses or maybe 80% of what their expenses were while they were working. And some may fully never retire, but take kind of part time or consulting type work.

I have a lot of engineering clients that have consulting gigs that kind of keeps them moving, keep them busy, keep that mind working in retirement. And so we started off talking about the first risk, which was tax risk and how taxes were going up in the future. And the second big risk was looking at sequence of return risk. Looking at that retirement distribution planning.

Now, we’re going to combine those two topics a little bit now and talk about tax buckets and which accounts you should be drawing from as you’re moving into retirement, having to draw on the assets. Because that’s really the big shift from the old versus the new paradigm, is that, in the past you had a guaranteed income source. Where you look to your pension, Social Security, and generally that would cover your expenses and you would not have what we call an income gap.

But now we have to calculate what we call our Fortified Income score. Where we look at how much of your income is guaranteed through Social Security or pension or annuities, and look at what your expenses are. And if there’s a gap there, we need to identify, how are we going to close that gap? And it’s important to run this through the tax lens of this concept of where taxes are going in the future.

And if you’re like many of us that think taxes are going up in the future, then we need to think about how are we going to manage that for retirement? How are we going to ensure that our retirement and what we leave as a legacy is as tax efficient as possible? And so it’s important to understand that in reality, we have three tax buckets. So basically, any asset can fit into one of these three buckets.

And the first bucket is the taxable account. So this is where you get the love letters from the IRS, the 1099’s. So this is your checking account, your savings account, brokerage account, post-tax investment accounts, any growth here you’re going to be taxed on. So, you’re not taxed on withdrawing principal from these accounts, you’re potentially taxed on growth, which at most, if it’s longer than a year could be capital gains, which might be 20%, let’s say. It could be nothing, but it could be 20%.

And then we have the tax deferred bucket. And this is really where we need to switch that paradigm, where the old school approach was defer, defer, defer paying taxes as long as possible. But given our current tax environment of the Tax Cuts and Jobs Act, the SECURE Acts being $25 trillion in debt, maybe it doesn’t make sense to save all our money in these tax deferred accounts.

Maybe it makes sense to look at diffusing that ticking tax time bomb that hits you at 72, where now, if you do have money in 401(k)s, traditional IRAs, 43Bs, you have to pay the tax sooner. Maybe it makes sense to pay the tax sooner rather than later. And then the last bucket is our tax free bucket. This is money that grows tax free. So think of Roth IRAs, Roth 401(k)s, indexed universal life insurance, house savings accounts, that have to be used for health care, 529s. The growth here grows tax free.

So, where you’re at in life, if you’re still saving, think about where you’re saving money. Maybe it doesn’t make sense to over funds those 401(k)s. And that’s what I’ve seen a lot of people do as they’re coming in for retirement planning, as they’re coming in for advice, they see that they saved a million dollars pretax. Well, guess what? You don’t really have a million dollars. You still have to pay the tax on it.

And what we find is that if we pay the tax sooner, rather than later, it’s going to minimize your tax bills. And we have some reports that we can run to prove this to you. That if, depending on your situation, if you have to pay the taxes sooner, rather than later, you’re going to have less tax that you owe to the Internal Revenue Service.

And I’m a big fan of putting more money in your pocket and less money in the Internal Revenue Service. I think you’re better at spending your money than the government is. And that’s I guess, just my personal bias. So given that, we need to understand that as we’re saving, maybe we shouldn’t over fund those 401(k)s or 43Bs.

And I’m not saying you don’t take the match. If your employer offers a match, you take the free money. You always take the free money. But once you’ve taken that free money, maybe you look at saving and other places. Saving, diversifying where you’re saving. Don’t have all your money sitting in those tax deferred accounts, because now you’re putting yourself up against the specter of that tax risk. Where if taxes go up in the future, if taxes go up 10%, understand that you’re taking a 10% pay cut.

Because again, we’re at one of the lowest historical marginal tax rates ever in history. Right now, the highest marginal tax rate is 37%. Well guess what? If you’ve heard of Ronald Reagan back when he was working, back when he was an actor, the highest marginal tax rate was 94%. During Korea, Vietnam war, it’s been 60, 70%. So most people think taxes are going up. So if you’re saving right now, think about where you’re saving your money.

And then, if you’re near retirement, this is where we kind of combine the two topics we were talking about previously, tax risk sequence of return risk. How do we plan that retirement distribution plan? Because again, the skill set used to accumulate all that wealth to climb to the top of the mountain, is going to be different than the skillset you use to get down the mountain. And as you move into retirement, you’re moving into a different time in the money cycle, where initials all about accumulation, accumulate as much wealth as possible.

Well, as you move into retirement, it’s all about preservation. What can you do to preserve what you’ve created and saved, and then distribution? How should you distribute those funds? And so the advisor, the help or the strategies you use to accumulate this wealth is going to be different than maybe the advisor the strategies or tools you use to preserve and distribute this wealth.

And this is where we need to look at tax buckets. So we need to look at what orders should we draw down these accounts. And again, this is the old paradigm versus the new paradigm, the old paradigm, your parents didn’t have to worry about this because, they had the three stools or three legs of the retirement income stool, fully funded. They had Social Security, they had pensions, and then they could draw on their assets.

For majority of people, as they’re moving into retirement, they don’t have a pension, or they took the lump sum buyout, Social Security, se can’t really depend upon that. And so really, it’s relying on what is our distribution plan? What is our income plan in retirement? And this is something that we help our clients with is we help them develop an income plan in retirement. So, if there is an income gap, we need to figure out which accounts are we going to draw on first?

And so, this is where if you do have an income gap and you’re in retirement, we like to have about one year’s worth of income, need, sitting in safety and completely liquid. So maybe this is sitting in checking savings, maybe CDs. So that’ll cover your income needs for the year, whatever emergency fund you need, whatever big travel expenses that should be liquid and available. So you’re not really earning anything on that.

And then we need to start thinking about where are we going to draw money? Which tax buckets should we draw from next? Well, if you’re one of those people that think taxes have to go up in the future, then probably if you have tax deferred accounts like IRAs and 401(k)s, we’re going to look at drawing from those accounts before we draw from the tax free accounts. Because those tax free accounts, we want those to grow in that tax free environment, as much as possible. Maybe that should be the last place we draw from.

So instead what we do is we look at drawing from those IRAs and 401(k)s, paying the tax now sooner rather than later. So that might cover our income gap. And then this is where we overlay the tax planning. And this is maybe advice that you’re not getting from your current a advisor. If you’re using one of those wire houses or brokerage accounts, ask them for some tax advice. They can’t give you any.

But maybe we should look at using those tax deferred accounts, paying the tax on those IRA sooner rather than later, and that can cover our income needs. But then we look at your tax bracket. So if let’s say you need $100,000 worth of income for the year, and you’re a married couple, that’s going to put you right in the middle of the 22% tax bracket.

Now that’s great. We pull whatever we need from the IRA, but that leaves us about roughly $70,000, before we jump into a next higher tax bracket that maybe we look at things like Roth conversions. Where we pay the tax on that pretax IRA, and now we move it to the Roth. Where now it can grow tax free. And maybe this is something that’s done on an annual basis.

And this is something that we do for our clients is we do tax planning and we even do tax preparation, where we look at your tax brackets, figure out how much tax you’re paying, figure out how much space you have before you go into the next tax bracket. And again, this is just a part of the retirement planning puzzle. Too often, people just focus on, “Well, what are my investments doing?”

In reality, there’s five key areas in this changing world of retirement planning, in this new paradigm, that you need to take into account when you’re structuring a plan or putting together a plan for retirement. And if your advisor or counselor or whoever you’re working with, or even if you’re doing it yourself, if you don’t have these five areas in place, then I invite you to give our office a call at (844) 885-4200. Again, (844) 885-4200.

Not to say that you’re doing anything wrong or that whoever you’re working with is doing it wrong, but it just might not be complete. So you need to think of five key areas. And first is income planning. And we spend a lot of time on the show talking about developing that income plan in retirement. The old paradigm was all about your pension is kind of the most sturdy leg, and then you had another sturdy leg of Social Security. And then maybe if you needed it yet, another leg where you draw on your investments.

Well, now in this new paradigm, a lot of times we don’t have that pension to rely upon and we might have an income gap. So how do we create that income stream in retirement? And that’s something that we can help you with. We have what we call our Fortified Income score. And then the second piece is developing an investment plan, understanding that we might have what’s called sequence of return risk, where we might have to draw on our investments in retirement. And then if that’s the case, which assets do we draw on? How can we make sure that we invest in such a way that we’re protected or insulated from that sequence of return?

And then third thing we need to take into account is tax planning. I’m not just talking about tax preparation, that’s looking in the rear view mirror, but I’m talking about tax planning. And this is one of the biggest opportunities and biggest risks right now, if you don’t address it, is tax risk. We know that in five years, if not sooner, taxes are going up.

So if you don’t have a tax plan, if whoever you’re working with, doesn’t have a tax plan for you, if you’re doing it yourself and you don’t have a tax plan, then you’re not protecting yourself from one of the biggest risks in retirement right now, part of this new paradigm. Your parents didn’t have to worry about this as much, you do. So what is your tax plan? Not looking at taxes through a micro lens of minimizing taxes in one year, but through a macro lens of minimizing taxes over your lifetime, and what you leave to the next generation, especially given the SECURE Act.

And then the fourth thing that you need to plan for, is health care. So how are you going to cover health insurance costs? If you retire early, you can’t claim Medicare until 65. How are you going to cover your health care costs? Are you going to use [Colebra 00:48:41] if you retire? Then once you’re 65, what’s the best Medicare plan? And then what about long-term care costs?

And this is the third biggest risk that I see for retirees these days. The big three being tax risk, sequence of return risk, and then long-term care risk. Right now, the average cost of a nursing home is about eight to $12,000 a month. What if you have a stroke and you’re married and now you need long-term care for the rest of your life, how are we going to fund that care? How’s your spouse can be taken care of?

And then the fifth thing we need to plan for is your legacy plan. How do we ensure that whatever we have left at the end of the day is left to the next generation as efficiently and effectively as possible. And understand that the IRS is coming after those inheritances. That’s what the SECURE Act says.

Prior to January 1st, 2020, prior to the SECURE Act passing, you could leave pretax IRAs, 401(k)s, 43Bs to the next generation, and they could stretch out those taxes over their lifetime. But now all those taxes have to be paid within 10 years. So that tells me the government’s coming after those inheritances. So what can you do to leave things to the next generation? So it avoids probate. It minimizes taxes. And your beneficiaries are protected from divorces, lawsuits, creditor actions, bankruptcies.

So those are the five key areas that you need to have a plan for as it relates to retirement, especially in this changing world of retirement and legacy planning, understand the strategies that your parents used in retirement and legacy planning, maybe or not appropriate in this new world, especially in the post-pandemic era.

So maybe it’s time to sit down and develop a plan to address your income plan, address your investment plan, address your tax plan, address your health care plan, address your legacy plan, make sure that you have a plan for all five of those key areas. So at the end of the day, you have peace of mind in a fortified retirement and legacy plan.

If you do want to get started on that, give our office a call (844) 885-4200. We are meeting clients in limited situations, face to face following all the social distancing guidelines. And we’re doing a lot of phone calls and Zoom meetings. I’ve become pretty efficient at the good old Zoom meeting. So we can start this process from the comfort of your own home. And I look forward to working with you on that.

So, if you are interested in that and you wanna get started on that you can email us at contact@castlewealthgroup.com, just put in the subject line, retirement plan, and we can get started or give our office a call at (844) 885-4200. So this has been Chris Berry, hopefully you understand that the world of retirement plan is changing and I want to make sure that you’re protected for you and your family and the next generation. Make it a great week. Take care.

Learn more about Chris Berry, and how he can help your family by visiting online at thechrisberryshow.com. That’s thechrisberryshow.com. You can also call Chris Berry, at (810) 355-2584. That’s (810) 355-2584. This program content reflects the opinions of Chris Barry and his guests, not Castle Wealth Group or Advisors Excel, and is subject to change at any time without notice.

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