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2022 EP0604 - Richon Planning - Inflation & Taxes in Retirement

Planning Matters Radio / Peter Richon
The Truth Network Radio
June 4, 2022 9:00 am

2022 EP0604 - Richon Planning - Inflation & Taxes in Retirement

Planning Matters Radio / Peter Richon

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June 4, 2022 9:00 am

Your Best Investment Options to Fight Inflation & The Myth of Retiring in a Lower Tax Bracket   The Consumer Price Index, or #CPI, dipped to 8.3% in April, marking the first slowdown in eight months. Some experts say we’re past the peak of inflation, but Peter Richon with RichonPlanning disagrees and tells Erin Kennedy there are strategies you can put in place today to guard against inflation, including Hedged Equities and Structured Notes.   Also, if you do not have a #taxplan, you do not have a #retirement plan. In the second half of the show, Peter breaks down this common misconception: you may not be in a lower tax bracket when you retire.   But there are strategies you can implement now to create tax-free income in #retirement and take advantage of today's historically low tax rates, including Roth Conversions.   If you'd like to how to create tax-free income in retirement, please reach out to Peter for a complimentary consultation by calling (919) 300-5886 or by visiting   #Income #Taxes #FinancialPlanning #Investing

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Finishing Well
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Financial Symphony
John Stillman

Plan planning matters radio Peter very good to you and very important.

How late inflation was the story of last year and still be in place in this year's summary yarn I want to see some interesting numbers because this good news, US inflation rate dipped 8.3% in April, marking the first low down and eat month. Some experts say we are past of inflation on the upward pressure is remain so. We can do now to guard against elation. I unfortunately am skeptical about the insights of those experts on whether we are past the peak and were certainly not past the pain by any guy we are seeing prices increase. It seems like almost on a daily basis and I know that the CPI has adjusted slightly downward but the real-life expenses that we pay in the grocery store and at the pump and for medical bills or everyday routine expenses really has not seen any decrease and the fact that these companies have been able to charge prices that people have up to this point been willing to pay doesn't really give any company incentive to drop those prices either and what were seeing is with the shortage that we have seen with the supply chain issues that we have incurred a lot of companies are just now renegotiating prices for their supply chain for the goods that they are receiving that they in turn sell to consumers and those renegotiations of the contracts and the storage and the shipping and the trucking and supplies.

Those are getting more expensive as well. I mean we saw Walmart and target stocks tumbled they missed earnings but a lot of that was due to the fact that they cannot raise prices fast enough on consumers to offset the cost that they are having to pay to buy more goods to replenish their supplies and so I'm hoping that we see some type of stabilization in inflation but I don't see it going away or being a nonissue anytime soon. Right now, and I'm it does hurt to go grocery shopping to fill up the car. You are so right about what we sing on the markets be seen breaking yields as investors move out of stocks and into treasuries. Are there any actions that we should be taking now to guard our investment against inflation will that's a move that I think is sort of a natural reaction when we see market volatility wants to leave the party when everything is going really well and everybody's having a good time and in the stock market is rising, everybody wants to be in it, but as soon as we see volatility in the markets.

It's sort of the natural reaction for many investors to try to exit what they think is early but ultimately often times it's a little too late and it's just locking in losses.

Now what we are seeing is that with the Fed's approach to controlling inflation, rising interest rates that the interest rates on borrowing money for instance for mortgages seems to be reacting a whole lot faster than on savings and deposits and investments. I mean the mortgage rate has almost doubled already this year, whereas the rate on your checking, savings, CD money market is not seen nearly the increase also the rates seem to be reflecting much quicker for short-term rates then long-term rates so the 30 year treasury has not adjusted nearly as much or as quickly as like the five year rate on treasuries and so we we are nearing that territory of the dreaded inverted UM curve which has in previous times been a precursor that signaled the potential for recession right now. There've been times where his inverted where we have not seen a following recession as well, but it is one thing that economists do pay attention to what we do well there are options out there. You know the market and inflation do not always coincide in an agreeable way. If we flashback to like the 1970s and early 80s were inflation was a big factor.

The market did not help us to offset inflation during that time, and so were looking to things like structured notes defined outcome investing I bonds are a fantastic option right now because they do reflect what the Fed advertises as the inflation rate.

So as of right now you can get as much as anything can be said to be guaranteed or risk-free in the financial world, a rate of 9.62] from the your federal government government-backed on I bonds now. Anytime the government gives us something good. They limit how much we can take advantage of so you can only do $10,000 per year per person. I wish we could do more but those are the limitations I don't see inflation going away anytime soon.

So while that rate can adjust. I don't see it falling precipitously or dramatically in the course of the next year so what actionable advice for you know people have maybe a longer time horizon, but I'm sure that advice is a little bit different for somebody who is in or near retirement said during this period of high inflation. What should pre-retirees and retirees be doing right yeah it's definitely gotta be different because during your earning years during your working career. Hopefully your wages adjust with the cost of right you can negotiate pay raises or or or work into better, higher paying jobs whereas during retirement.

You got a fixed income and a set finite amount of money on day one you've gotta make it last. Therefore, Aaron, we gotta be proactive you can't wait until periods of high inflation to plan for high inflation.

You've got to plan for higher inflationary periods, even during periods of low and relatively relatively stable inflation. Those are conversations that really a prudent plan or a cautious experienced advisor is going to have pre-retirement or in the very first planning years of retirement because costs do go up over time. That's a fact. That's inevitable the value the purchasing power of the dollar has dropped considerably over the years, and that's not gonna stop. It's going to continue that trend. And so we need to plan for retirement in a way that either has increasing ability to generate more income throughout the years, or separate segmentation's of money that can be kicked on over time. Throughout the years, or identifying basically a time demised portfolio that has now money soon money later on down the road. Money and growth money and during good periods. We can sort of harvest some of that growth money to supplement those other book. While these are really important considerations and you brought up some specific investment opportunities if somebody would like your help to design a portfolio that can withstand these periods of high inflation are some of those again hedged equities and structured notes that you mentioned. What's the best way to reach him call the office 919-300-5886 919-300-5886. You can email me it looks like Rich on plantings.

My last name of Peter.

It was Sean go online, which on on the base. I think you always a pleasure. And thank you dear good to see you today.

We are doing a little busting, which is always fun and today is the myth of retiring in a lower tax bracket. I've heard before that if you don't have a tax plan. You do not have a retirement plan right often ignored facet of holistic planning, and it can have major ramifications a lot in retirement.

We are not making income anymore, and therefore were not going to be in his private tax bracket.

That's not necessarily true. Right.

It is not true doesn't mean that expenses go away.

It means that the paycheck goes away. But I still have income. I mean, the majority of Americans have Social Security and tax-deferred savings and so the I wouldn't call it a myth necessarily, but I think that it is in older way of thinking that we need to readdress and reconsider that taxes will be lower in retirement.

I think that this came about as we were in a previously much higher tax environment. But today, rates have fallen and I think that the thinking up to this point was pretty spot on an accurate but looking forward not going to be the case, Social Security was once a tax-free stream of income.

But most Americans are going to pay tax on their Social Security 50% or 85% of Social Security can be taxable, and most Americans who have done some proactive savings for retirement have done so in tax-deferred accounts. So when we create income from those in retirement. It also is taxable income.

Now, historically, we are in a comparably low and attractive tax environment. Today tax rates have been much much higher.

In times past than they are today at one point up to as high as 94%. In fact, I why Ronald Reagan got into politics that he realized that if he made more than two movies within one year.

Basically he was only going to net 6% of his pay for acting in that third movie and and he didn't like that so we ran for governor in and then subsequently for president, obviously, but you know we are today in a much lower more friendly tax environment. However, the writings on the wall here. In fact it's already in law tax rates will be going up in 2026.

Unless this administration turns around and says hey the policies about last administration work the way that we should handle things which I really don't care who's in the White House, written in the administration, it almost never happens, but certainly not with these two dynamically different groups so the 2026 tax rate will be the expiration of the tax cut and jobs act that went into effect in 2017 and the 12% bracket is slated to go up to 15%.

The 22% bracket is slated to go up to 25%. The 24 slated to go up to 28 so it's not just on the REIT evil rich millionaires or those making more than 400,000. This is really an across-the-board tax increase on just about everyone which makes it a great time to do some proactive tax planning. Aaron, you mentioned it. If you don't have a tax plan, you don't really have a retirement plan is not what you have in those retirement accounts of how much of it you get to keep, and for most Americans that involves some amount of proactive tax planning, very careful, very prudent to keep as much as possible without getting into any great areas because there are some fantastic opportunities to control and manage your tax liability right anything you write. Everybody is in agreement essentially that taxes are going to go up. We talked about the US debt before rights over 30 trillion right now so you mentioned some options that you prepare for those hikes now. Is there anything that I can or should be doing well. I think that if you can harvest dollars out of those tax-deferred accounts and convert them to Roth is a fantastic time to do that and let no crisis go to waste. Identify opportunities where you have them. I know that everybody's really nervous and focused on the market right now but for savvy proactive planners, they may be looking at this as an opportunity to convert over dollars get them into that Roth account where any recovery that we do see is going to happen tax-free rather than tax-deferred. There are other places that you can generate some tax-free income as well mean we've heard of tax-free municipal bonds, there is the opportunity for cash withdrawals. You can access the equity in your home. I think that that is a measure of last resort, but the reverse mortgage is a place where you can essentially get tax-free income. I've seen people use that planning strategy in a couple different ways. I mean ideally I like to continue to let tax-free dollars grow for as long as possible and be kind of the last thing that we access but if you are retiring before age 65, then building up some kind of tax-free income to utilizes as a stopgap measure in the doughnut hole and and building up nonretirement assets.

If you are looking to retire before 59 and especially is very important in your planning process so that's a goal for you were a situation that you are facing.

You need to think about taxes and penalties on accessing your money and how to go about doing that in the most efficient, effective manner possible.

This is really helpful. I think it helps me understand why having that tax plan has to be part of your retirement plan if somebody would like your help creating that tax plan. What's the best way to reach him yet definitely reach out whether you're saving on an ongoing basis or you already have a sizable amount built up in those tax-deferred accounts right now is the time to plan proactively and we can run some side-by-side comparisons and show people the numbers quantify how much it would cost if you simply defaulted to the IRS's plan verse. If you were a little bit proactive in identifying these opportunities now, and the difference is often staggering. A lot of times Aaron if if I'm talking to like a 60 to 65-year-old and they're looking at that retirement account in an IRA or 401(k). The ultimate tax bill if they just default to the IRS's plan is often times more than the account value is today and then we can pay it for a fraction of that price. If we plan effectively.

So get in touch.

I can run those numbers for you, ladies and gentlemen, give me call 919-300-5886 919-300-5886. You can go online Rochon it looks like Rich on rich on email me Peter Sean planning and I wrote an article last year that was featured in in several magazines about proactive tax planning, but the gist of it was the more wealth that you have the more expensive this is to over one taxes so it it means that really everybody needs to look at this, but specifically if you have more affluence, more wealth in those tax-deferred accounts that make sense thank you thank you thank you. Today we have a million-dollar question is the 4% rule updated as you know, for decades, retirees have relied on the 4% rule no that was a safe amount take out during retirement.

Another as inventors of the current market conditions may require an even more conservative approach.

What is the 4% rule so the 4% rule is a general guideline for how much income you should be able to create given a lump sum on the starting date of retirement and it has been projected. It has been utilized by most Wall Street firms in an assumptions for retirement that you should be able to generate a 4% cash flow. So with a hypothetical million dollars. That's $40,000 a year of income and the instructor of this rule Bill Bingen was a financial advisor and analyst, and he inspected the rule back in the early 1990s, nearly 30 years ago and under a very different set of market circumstances.

Interest rates were much higher than the market was doing well.

He's been interviewed many times including on the planning matters radio program I interviewed him several years ago and he said this was actually before the recent market volatility that we have seen in before COBIT. He said that he felt comfortable still maintaining that 4%, but two things to caveats. It was always intended for institutional investment, not individual investors. So right there. That's the law of large numbers rather than me as an individual specific investor and then he said it also completely negated the possibility of a large market downturn happening in the first two years of retirement.

That's a big if tonight the gate now. I don't know if you've ever heard of the island of California. Aaron and I don't know that I have either, so back when maps were first being charted of California cartographers who explore that area went up the deep Peninsula and didn't continue all the way to the end. They actually showed California as an island on the first maps that were drawn and even though new information came out as little as three years later, in some instances, California continued to be drawn as an island for nearly 300 years, so this is an example of people just using old information and continuing to duplicate it.

Rather than taking into account new information which disproves the old information. I think with that 4% rule. Largely that's what's been happening.

Wall Street has simply used what was at one point generally accepted rather than actually including the new information that has happened since that has proven that this is possibly a problematic way to go about forecasting retirement income.

Thank you for teaching me something I had never heard of the island of California. So when you talk about that new information that's coming and I think chief among them is going to be inflation in writing.

This is the headline of the year.

CPI had a .5% in large numbers. We haven't seen since the 80s. What should retirees be taken into consideration when they're trying to determine the percentage yet well even the instructor of the rule Bill Bingen said that given these new inflation numbers. Retirees also have something else to consider if relying on or utilizing his rule are really a theory, and he said that this is something that we need to strongly consider as well as the much much lower interest rate environment.

The correlates and and has fallen over last 1520 years, really, and the additional market volatility that we have seen all factors to include so Vanguard MorningStar Wharton school of business. The several American College for retirement income planning several kind of major entities that study retirement that study finance of all come out kind of across the board and said we really need to pull back our expectations to lower our expectations for how much income a portfolio can generate for us. Now here's the thing Aaron it's maybe in the model that they are using to create that income rather than the income cash flow rate because if we use a market-based type of asset allocation, the traditional 6040 model there's volatility and there's low interest rates to contend with. Whereas, if we are using alternative tools and methods.

There are places out there that you can actually contractually guaranteed an even higher cash flow around retirement age and if you take the market risk out of things and base things on an actuarial life expectancy, you may actually even be able to increase that cash flow rate. So it's really all about that model. But if you go to the Vanguard tools and and retirement calculators, Vanguard being very famous for. Sort of the do-it-yourself investor and so they give you access to a lot of tools and calculators. If you run their retirement income calculator and you you project the numbers out with the traditional 6040 portfolio they give you about a 90% probability of success following the 4% rule.

What does that mean well, there's a 10% probability of failure which means running out of money and if the weatherman tells me that there's a 10% probability of rain. I may feel comfortable leaving my house without my umbrella. But if my retirement model is my plan for retirement is based on a theory or a rule with a 10% accepted probability of running out of money. I'm really carefully examining that plan. In deciding whether uncomfortable with those assumptions and in those projections.

So I thought that from what you're saying. I mean I understand this is incredibly complicated, but it's so important because it addresses the number one fear for retirees right of not running out of money in retirement. Is there a number. Is there percentage that you recommending to client.

What I think that 4% is a place to begin the conversation you know people are expecting that a lot of heard the market has averaged 10%.

So I should be able to generate a 10% cash flow. We need to have a real come to earth meeting about what expectations are and what the difference between rate of return and cash flow is but if we start that conversation with approximately a 4% expectation for cash flow. We can probably save those expectations are pretty reasonable and then there's the important part. Aaron, make adjustments based on real-world conditions as we go along.

First and foremost, we have to have a proper allocation to begin with. In order to start to think that we can achieve this type of cash flow but maybe we have a little bit of diversification with a safe money bucket.

That's not going to lose if the market goes down with some type of long-term yet conservative money bucket that that isn't going to fluctuate a great deal and then our risk bucket in good years, maybe we can create the income exclusively from the risk bucket if if we got it 10 or 20% rate of return on that side. It made good time to take some of those gains off the table and use that for income, but in downmarket years, we've really got a tap into an different source because we don't want to remove dollars at a loss lock in those losses and remove those dollars ability to participate in any recovery. And so it's really about the proper allocation during our working years. Our paycheck pays for our bills and actually supports our ability to take risk with investment that really changes in retirement. Now the investment portfolio or the life savings represents the paycheck. It's an opposite equation there and we really need to take a different approach to how were handling the potential risk of market losses early on and especially how to create that income with a realistic expectation that we don't know the future of the market and we need to be prepared for, any scenario, up, down or sideways right now. I like that your mentioning income because that is such an important part of the equation and so what I'm hearing you say to is I wish we could follow one rule right if we can all just a 4% and forget it not be great, but of course it has to be a little bit more personalized and you and I were talking about off-line here was how things can change when your money is managed by a professional. So what am I looking at here. Yeah, not only does it need to be more personalized, but it does need to adjust for conditions so were looking out on this chart is kind of a traditional buy and hold methodology versus a methodology that actually adjusts for real-world conditions as they happen, otherwise known as tactical management and what this chart shows is that tactical management actually helps investors outperform that traditional long-term buy-and-hold strategy where they're just riding out any market conditions ebbs and flows, ups and downs. If we actually make proactive moves to adjust during those periods of time by and when things are low or move more aggressively sell out when things are high when their profits on the table even if it's just a strategic kind of regular quarter quarterly rebalancing. It can dramatically improve results so investment is not set it and forget that's what were looking at on that chart. What we really need to understand is that we need to be a little bit more more proactive and if you don't do that yourself then even with the potential additional cost of consulting with a professional advisor.

All you can probably make out even better in the long term with better results long-term.

Having that proactive tactical and strategic management on your money right very well said Peter somebody would like you to kind of take a look at their income and their expenses to figure out what's right for them. What's the best way to retail. You can call the office 9193005886919, 358, 86, you can email me where you cannot go to the website for John it looks like Rich on and you can download a copy of my book there.

Understanding your investment options actually goes through a little bit of the transition from accumulation preservation distribution.

The tax implications involved with all of those and then what the spectrum of the financial world has to offer is yes thank you matters. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy you are encouraged to think investment tax or legal advice from an independent professional advisor.

Any investment and/or investment strategies mentioned involve risk by jury. Services offered through virtual capital management.

The registered investment advisor. Fiduciary duty extends only to investment advisory advice but does not extend to other activities such as insurance or broker-dealer services advisory clients are charged a quarterly fever as a product of a commission which may result in a conflict of interest regarding compensation

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