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August 8, 2017 2:04 am
Have you ever noticed that you look completely different in the bedroom mirror than you do in the bathroom mirror? In the same way, your portfolio can look completely different depending on how closely you look at certain things...
Welcome to Mr. Stillman's opus and gentlemen, of course, here starts really excited about John's podcast today because John says he wants to talk about the difference between the room mirror in the bathroom mirror and I was curious as anyone. What the heck that means I can make financial sense of that night. Well any time I look in the bedroom. Well that this applies to everybody, but any time I look at myself in the bedroom mirror looking good today man really. But then I go look in the bathroom mirror in the bathroom mirror is like well if it's not the king control of blemish. Bill ran late so much brighter exactly completely different life and you look fine in the bedroom mirror and not so great in the bathroom mirror. I know what you mean.
Now there are financial parallels to this because a lot of people are looking at their retirement plan with the lighting from the bedroom when they really should be looking at it with the lighting from the bathroom okay and will we put the brighter lights on your retirement planning portfolio. We find that there's a lot more blemishes here. Then we thought when we were just looking at it in the bedroom near right bathroom light will illuminate all that blemishes concerns actually and then you can address them appropriately. So I let's talk about what that might look like bedroom mirror versus bathroom mirror looking at your retirement plan from the standpoint of generating income and a lot of people say well so this is the bedroom mirror approach is right well I have $1.5 million and I'm going to need to come out $10,000 a month to make what you can figure out exactly how much money you can have coming in from rental pension, Social Security, and then how much more you need to generate from your investments to fill that gap to get you $10,000 a month and then you can see okay well how much I might have to take out my portfolio each month to make that happen.
Okay that's looking at things in the bedroom mirror he say all right well I need $4000 a month. That's $48,000 a year that I'll be taking out of my 401(k) or whatever you looking at about a 3.2% distribution rate withdrawal rate from your portfolio which is which is not that that's pretty sustainable to take only 3.2% out of your savings. Each ear but when we look at it in the bathroom mirror. That's when we start to see right well maybe it's not so simple because that money that you have in your 401(k). What investments are you using to generate income from that account and are we just taking things like interest and dividends. Usually the things in your 401(k) are just mutual funds are not really set up very well to pay income gift to sell shares of something in order to create that income. So if that's going to be the plan. What are you doing, what is the what is the physical mechanics look like and how are you going to generate that income is it income producing investments you have to sell stuff to make it happen. That's what the bathroom mirror wants us to look at and then maybe things like what if we have a market crash. How does that affect our ability to generate income, or if were selling shares of stuff to generate her income and the whatever the stuff is what saves $100 a share and you know were selling a certain number of shares a month and we have another 2008 and now that's worth $50 a share will now you can do the math. We have a sell twice as many shares of whatever is to generate the same income.
That's where the bathroom mirror looks at your plan for producing income and saying I this is maybe not the best way to go about this. And so that's where the better lighting might help you have a very demanding bathroom mirror, you know, if you want to look good in retirement. You will be sure you're using the right lighting well while it makes a lot of sense.
Now I'm surprised you know I didn't have any other. Where you going when you started this conversation but you shine the bright lights of Broadway on something you're going to see a lot more. Is there anything else that you might have revealed in the bathroom mirror that you might not see when you look into the bedroom mirror well usually taxes for a lot of people.
They have really shined the light on their tax picture that much in retirement.
I think a lot of people say well, and you have to pay taxes in retirement, but they haven't stopped to think about the fact that in a lot of cases. Every single penny of their income is going to be taxable now for some people that's not the case. Maybe if you have a lot of money in raw Thor. Maybe you have a lot of money in an after-tax account where you be taxed on the gains but not necessarily all of it taxed as income on that something where we want to shine a little bit brighter light on there and have a better understanding of exactly what kind of taxes are you will be liable for in retirement. So as an example in the bedroom mirror. You might say I've been at a 21% effective tax rate. Let's say for the last 10 years.
My working life. Okay, I'll assume that it'll probably be about the same is not a little bit less in retirement because you tend to pay less in taxes in retirement right okay well maybe, maybe not. Again, it's going to depend on the type of assets that you're using to generate that income for you bathroom mirror would say, all right, well let's actually look at what your projected income is going to be. Let's look then and how that's going to affect the taxation of your Social Security. That's a big thing. A lot of people take into account your Social Security depending on your other streams of income is either going to be not taxable at all. It's going to be half of it will be taxed, or 85% of it will be taxed.
The overwhelming majority of people listening to this are going to be that 85% right now that doesn't mean 85% of your Social Security is taken away in taxes. That means 85% of your benefit is going to be taxed as income. So for all intents and purposes, it's just as taxable as those IRA withdrawals. You make the bathroom mirror helps us see okay will we need to be planning for that because what if what if we're in a place where we could be taking a certain amount of income and are Social Security's only 50% taxable. But then we take just one or two more dollars more from the other buckets that now makes that takes over the cliff and now are Social Security is 85% taxable instead of 50%.
We want to know where that cliff this we want to know where the line is how much can we take from all these other sources and people still in this bracket.
That's were tax planning can really play a big role in that's with the bathroom mirror is good.
Take a look at that the bedroom mirror isn't seems like a really unfair situation when you can be in a situation where you have 85% of your Social Security taxed because that's that's your mom you are getting back after I put it in there for a very long time. So here's what here's what they say and you can draw your own conclusions as to whether or not this is accurate or fair.
Essentially what they say is that you put money into Social Security all those years. Let's say you're getting a benefit of what to make the math easy… Call $1000 a month and year and that 85% range where 850 of that thousand is taxable as income the other hundred and 50 is not taxed what the federal government is telling you is that that hundred and $50 is what you put in coming back to you tax free and the $850 represents your growth on the money that you've put in over the years, and that's being taxed so you know, like it. Well I guess that that's what they say you can do the math on whether or not that's that holds up that's that's really in sync. I can see a lot of people might get upset over that might be, you know, but at the same time. It's important you pointed out, because a lot of people don't really realize that they're going to have to be taxed on so much of their Social Security. In a lot of cases yeah and there deafly are cases I do have clients where we actually put together a plan where we've gotten them under the threshold so that they not taxed at 85% are leaving taxed 50% of their Social Security and that makes up pretty huge difference in their overall plan.
Now we had to use some tax-free sources like Roth IRAs very strategically in this plan and it's not going to be realistic that they'll be in that phase for their entire retirement but in a couple cases. We have two or three years whether Social Security is being taxed less. That really makes a big difference in the grand scheme of things.
What about the person who has 0% taxed on their Social Security well usually that's a person who's in still low income bracket altogether that there yet.
While it's nice to say that your Social Security isn't taxed at all. Usually your and that means you're in a situation where you have really very little income. Now, having said that, if you are really strategic over the years and I have a couple clients who are in their 50s who are putting all of their money into Roth right now so that they'll actually be in a position by the time there at this age, they'll have enough money in Roth that they can actually generate some tax-free income from that and they can actually still have a nice overall income be in that bracket, whether taxed, not at all on their Social Security. Now you gotta be far enough out where you can do the planning for that to make that work in your retirement. But for some people that's going to be a really effective strategy while okay will anything else we need to know about the bathroom mirror and suppose the bedroom mirror. The last thing I would say is, but is probably fees a lot of people are looking at the the light in the bedroom which is not that bright when they try to figure out what their fees are and you know maybe it's just looking at administrative costs within your 401(k) and not factoring in with the bathroom light would reveal, which is all of the costs inside of the mutual funds in your 401(k) it could be your variable annuities are pretty bad for this where you have if you just ask one of my fees to say maybe 1% or something like that what they call the administrative fee but then if you ask some very specific questions like what my mortality and expense fee and one of the subaccount fees and you start asking the right questions will suddenly volunteer all that information, but then I can tell you, unless you ask of you to say what are my fees. They're going to give you the lowest most basic one.
The cancer that's a great example of bedroom mirror versus bathroom. Your photo makes sense.
I have hand to you II had my doubts. We started talking about what the bathroom mirror might reveal as opposed to the bedroom mirror, but now it all makes perfect sense and glad we could shed some light on that for you see what I did. Thank you so much and is never nice reflected on the John Sylvan this is Mr. Stillman's opus. Thank you for listening to like find out more bits of wisdom like this then get in touch with John