Ep. 104: Tax-Efficient Bucket and Distribution Planning
The X's and O's
In this episode of the Retirement Plan Playbook, hosts Brent Pasqua and Matthew Theal discuss various aspects of retirement planning and investment strategies.
They delve into the importance of tax-efficient bucket and distribution planning to minimize taxation during retirement. The conversation includes a thorough discussion on managing short-term, mid-term, and long-term investment buckets.
They also discuss the impact of interest rates on the economy, and the latest advancements in AI technology with Apple's new features.
00:00 Introduction
02:02 The Importance of Updating Beneficiaries
03:28 CPI Updates and Federal Reserve Insights
08:44 Apple's WWDC 24: New AI Features
15:51 Retirement Planning Corner: Bucket Strategy
23:23 Choosing the Right Investments for Each Bucket
24:06 Managing Emotions and Trusting the Process
24:54 Tax Efficiency in Bucket Strategy
27:24 The Importance of Having Multiple Buckets
32:46 Distribution Planning and Roth Conversions
35:14 Simplifying Bucket Planning
37:16 Evermont Recommends: Entertainment and Style Tips
40:13 Conclusion and Contact Information
Connect With Evermont Wealth:
Transcript
Intro: Welcome to the Retirement Plan Playbook hosted by Brent Pasqua, Matthew Theal, and Joshua Winterswyk of Evermont Wealth. This podcast dives deep into investment strategies, retirement planning, and current events, equipping you with the insights needed to craft a robust retirement playbook adaptable to any political or economic climate.
Intro: Join Brent, Matthew, and Joshua as they guide you through the complexities of retirement planning. Offering expert advice. to tackle challenges and the later stages of your journey. It's time to build your optimal retirement playbook. Now let's dive into today's episode.
Brent: Welcome to the Retirement Plan Playbook. In this episode, we're going to be discussing maximizing your retirement by tax efficient bucket and distribution planning.
Brent: And I know that sounds like a mouthful. Yeah, it, but it's not, and it's extremely important if you want to minimize taxation and retirement and keep more money in your back pocket and like be efficient and strategic with your investment strategy. So we're going to get into that. I am your host, Brent Pasqua, founder of Evermont wealth.
Brent: I'm a financial advisor and I'm helping people navigate through these complex retirement planning strategies. I'm here with Matthew Theal, who is a certified financial planner. We are here just you and I today, bud. How's it feel to just to us?
Matthew: I'm looking forward to it. I didn't really like the other guy who was on the podcast, so I'm happy he's not here today.
Matthew: Yeah. We just kicked him out. I'm totally just kidding. Yeah. Unfortunately,
Brent: Josh isn't here today, but yeah, I'm looking forward to doing the show with you. Excited. Josh has had his baby, so he's a sitting this one out. We're not letting him back in the office for what is it called? Like paternity. I think he's out six weeks.
Brent: I don't know. So they, they give people a lot of time. When I had my first child, I was out for a couple of days and then it was back to the grind. But nowadays we have to give people time off and I'm sure. Josh is welcoming it. And he's gonna be able to take care of his baby and his kid and give him some time off.
Brent: So let's get into it. You said he had some warmup stuff. What, what do you have for me?
Matthew: Yeah. Do you read the wall street journal? Sometimes. So there's this good story in there. And I think this is really important for all the listeners. So there's this guy who passed away and he left a million dollar retirement account, except he left it to his girlfriend from the 1980s.
Matthew: Cause that's who he put on as the beneficiary and he passed away in like 2015 or 2016. Lucky her. Well, so yeah. So that is, yeah, she got lucky, right? So she gets this million dollar retirement account. Well, it sounds like his family is like suing her trying to like get the money. Yeah. Good luck on that.
Matthew: Yeah. So I guess what happened is he, he did his, you know, 1980s when he started working for his company put his then girlfriend on as the time as the beneficiary and never changed it. That's a big mistake. Huge mistake. So the reason I'm talking about this to all listeners, everybody, and we do this with our clients, but check your beneficiaries, make sure everything's updated and it's the proper person you want getting the money on all your accounts.
Brent: I'm surprised you don't hear about this happening more often though, because I can't tell you how many times we go through clients beneficiaries and like, Oh, I want to change that. Oh, I need to change this. And a lot of people just don't go in there and check and see who their beneficiaries are. You know, if years go by fast and a lot of times people just don't check them.
Brent: Ausolutely. I know we review it annually with
Matthew: our clients, so. It's important.
Brent: All right, let's get into the hot tech headlines. So we have some CPI updates. The CPI rose 3. 3 percent over the past 12 months, ending in May of 2024, down from a 3. 4 percent increase from the previous month. And the CPI increased 0.
Brent: 4 percent in May compared to April of 2024. Given the slight increase in core inflation, what can we expect from the federal reserve in terms of interest rate adjustments?
Matthew: Yes. I think inflation has been the big surprise this year. It, the federal reserve is expecting it to come down, but it picked back up again through the first six months of the year, this report was seen as positive because it did tick down slightly.
Matthew: I know people are listening to say no, it didn't. You know, our fast food prices are still high as you know, everything's still high. It's like, yes it is. We understand that. But you know, this was a pretty good report. The, the market liked it. Stocks went up, which is good news. And. You know, we're thinking we might be able to get a interest rate cut at some point this year.
Matthew: That said, I mean, the data could always change. We thought we'd have, you know, a couple of cuts by now, but the inflation data picked back up. So the federal reserve wasn't able to cut. So we're just in this data dependent world as with regard to interest rate cuts and inflation right now. Fast food
Brent: prices and food
Matthew: prices are never going down, right?
Matthew: No, never again, especially not in California because of the Minimum wage hike that Mr. Newsom put in effect.
Brent: Yeah, I don't, I just don't see cost of goods in any capacity really going down anytime soon, unless there's like a major catastrophe. I think we're probably stuck at these new higher prices.
Brent: Yeah, I think we just don't want them to grow as fast as they've been growing. Jerome Powell had comments this week they had the Fed meeting, and the Federal Reserve decided to keep the benchmark interest rate unchanged at five and a quarter percent to five and a half percent for the sixth consecutive meeting.
Brent: The market expectation suggests that the first rate cut could occur sometime in November, but this is contingent on achieving the inflation target. We've been talking about this on the pod for month after month about what we think potentially can happen with interest rates. The beginning of the year, it was in March and in March, it was going to be in June, June.
Brent: It was going to be in September potentially. And now we're talking about November. Are the feds going to cut rates?
Matthew: I don't know. I'm quite a, it's like the one thing I'm slightly bored about . You know, like we just don't know if it's going to happen. What's kind of interesting though, is I feel like it's setting up to be like in the stock market, at least a sell the news type event where the market, we all know the market's having a great year as of recording.
Matthew: We're up about 12 percent in the market. When this eventually does happen, they say now one time so, you know, we've got to take them for what they say. They're saying one time, let's believe them. I feel like the market's going to probably correct when this happens.
Brent: Do you think they're just because of what's happened over the last couple of years with inflation, do you think they're more conservative with the moves that they're making?
Matthew: Absolutely. So all the fed governors, they know their history really well. And they remember what happened in the 1970s where in the 1970s, the then president Arthur Burns. Thought inflation was dead. So we started cutting interest rates, then inflation skyrocketed again. And it led to the 1980s where interest rates were, you know, 18%.
Matthew: Like we know a lot of our listeners know this, their first mortgage was probably like, you know, 13, 12%. We have so many clients who tell us that.
Brent: One of the questions I keep getting from clients is, do they, do you anticipate that The feds are going to do something with rates that would impact the election.
Matthew: You know, that's a good question. Historically, the fed has stayed out of elections. So I find the November rate rate cut to be kind of suspicious. I would imagine it either happens before. Or it doesn't happen, you know, in November
Brent: because Jerome Powell was put in by the Trump administration. Right. So, I mean, I can't imagine he didn't meddle in the election last time.
Brent: Mm-Hmm. . And I, I can't imagine that they meddle in it this year.
Matthew: Yeah. I, I, I don't think so. And you know, the other thing too I wanna talk about real quick is that a lot of misconception about what a rate cut means. When the Fed does cut rates, we're talking about like 0.25%. We're not talking about, they're gonna cut rates back down to like 3% or 2%.
Matthew: We're talking about like a quarter of a point, which is 0. 25%. So I think you said the rates at what? 5. 5 right now. So we're talking about going to 5. 25, which is a big misconception. I've heard when I talked to a lot of people. So this truly might not have that big of an impact, but it could impact the market.
Matthew: It could, it will impact bond and stock market prices. But as far as everyday people go who are listening to this podcast. It might not impact you as much as like the news is making it out to be
Brent: right and at that level It's not really impacting people who are looking to buy a home by all that much like it might spark the real estate market a Little bit right, but it's not going to impact it that much
Matthew: Now if they got back to like 4.
Matthew: 5, right, that's that's a different story. But you know 5. 25, man It's not that big of
Brent: a difference from where we are today I have an even better headline that I think is more interesting than just interest rates because you're right. We have been going over interest rates a lot, but Apple did their WWDC 24, which is like their big conference.
Brent: And they announced some new AI features Apple intelligence introduction, like they're going over all the new AI features that are going to be integrated into the iOS 18, the iPad, 18, the Mac iOS 15. One of the big ones that they have right now is the enhanced Siri. Like they're making this thing way more responsive, way more capable, way more complex tasks handling.
Brent: Like, what are they? I understand now AI is here, but now it's going to be here for the mainstream people who are using devices.
Matthew: Yeah, this is really cool news. They're basically, so to sum up what you said, they're building. AI features into your iPhone. So your iPhone now is going to have all of these custom AI applications built in and as you're using it, it's just going to kind of happen in the background.
Matthew: I think it'll be pretty intuitive, easy to use for most consumers. I mean, Apple's really, really good at making consumer products and software. I think a couple of the cool ones that I saw was that enhanced Siri. Do you use Siri, Brent? I don't use it that much. Siri is awful. I don't, I don't know anybody who uses Siri.
Matthew: Maybe my mom, but outside of that, I don't know people who use Siri. And
Brent: I don't, I think people use it on the fly a lot. They're not really using it in their normal day life.
Matthew: So the demo they showed is you know, Siri is acting more like if you've seen any of the voice demos with chat, GPT series acting a lot like that, where you could talk to Siri, Siri responds back to you, you could cut Siri off.
Matthew: Siri remembers what you said previously. So it's a much more enhanced series. Seems like it's very similar to that movie. Her, if you've ever seen that, I keep talking about the movie on the podcast and Joshua has seen it. Highly recommend watching that movie if you haven't seen it, cause we're kind of entering her time.
Matthew: So
Brent: what are they doing with emojis and photo editing? Cause that's another big one, right?
Matthew: Yeah. So just like how, if you've ever played around with an AI tool, you could edit images or create images. You're now going to be able to do that on your iPhone. So you'll have all the AI. Image editing you'll type in to the phone, like make this image brighter or make this image darker and automatically do it.
Matthew: You could crop out people who are in the background of photos. So if you're trying to take a family photo on the beach and there's a person walking a dog behind you, you could tell the iPhone to crop that person out. The iPhone will do it. It
Brent: seems like that's going to make people uploading images to social media even now quicker and probably like sort of like a game changer for them.
Matthew: Yeah, exactly. And it's going to make people hopefully better editing their own images and we should get some really nice looking images
Brent: out of it. And then also they have smart summaries and transcription. So they're enhancing features include. Like smart summaries of web content, Safari, and then transcription capabilities for audio recording.
Brent: So basically it's doing the same thing for web content and for audio.
Matthew: Yeah. So I'd imagine, you know, one next level of this is you're going to be able to record something on your iPhone, maybe like a conversation between you and a person, and then it's going to be able to transcribe it for you. Or, and give you the notes back.
Matthew: So maybe you're meeting with your accountant and you want to know what was said in the meeting, you could record it and then the Siri will automatically give you what was said,
Brent: right? So we post our show notes on our, on our weusite. And then, so people can actually read the show versus having to listen to it.
Brent: And so we do that through an AI software, but it sounds like people are gonna be able to do that with just normal conversations that they're having.
Matthew: Yeah. Yeah. And another one, I know you're, you're big on working out. I'm trying to get into working out. They're building in some AI features into the health and wellness section of their software, which I think is going to be pretty cool.
Matthew: Not really sure how, like it's going to work you know, outside of it being like, Hey, get up, you need to work out today. But I mean, you know, is that going to make someone really work out? I don't know.
Brent: I think I have a couple of questions about all of this. Number one, is this good for Apple stock?
Matthew: Originally. So what ended up happening was the stock dropped on this announcement and then there was a bunch of positive wall street research the next day. And the stock started taking off for a couple of days in a row and it's hit a new 52 week high now. So yeah, I'd say it's positive, but I would also say it just got priced in.
Matthew: So like, you know, it's going to have to be really good now for Apple stock to go up a lot higher from here.
Brent: But there seem to be the first one that's releasing all of these new features into normal society. Meaning like we know that the AI, like chat, GBT and all these other browsers are out there and these apps are out there.
Brent: But now they're like integrating these functionalities into our normal everyday life. And what I don't know, and I don't know what your thought is, is, is this actually good or bad for society?
Matthew: Well, I think it'll be good. Like a lot of these features are just making the iPhone more useful. You know, after, you know what, we've had an iPhone for like 12 to 15 years.
Matthew: It hasn't really changed that much.
Brent: It hasn't,
Matthew: Like I'm kind of bored with it. It doesn't do much. It's not that great. It's really just a camera. And like, you can listen to music or podcasts on it. Browse the web if you want to, but you know, at the end of the day, we should probably be putting our phones down a little bit more in society.
Matthew: To me, people are addicted to them. So I think these features are going to be really good to help us just use our phones a little bit better and maybe we'll start putting them down
Brent: more. Right. So they become a little bit more efficient and less dependent on doing things ourself with them. Exactly. Do you have any other thoughts on this AI conference with Apple?
Brent: I mean, I think, you know, it, this is the start of it to me. I mean, this is like the first big release of how AI is going to impact society. I assume a lot of this starts transcending into more into like Tesla and into Microsoft and Google. And you're going to start seeing now a lot of these companies releasing their new features of AI.
Brent: And how they're affecting their companies and how people are actually using them.
Matthew: My final thought is, you know, Apple's getting this into the hands of consumers which is great, like you were saying. But when I look, you know, where are we in 2030? Where are we five, six years from now? I'm not sure we're using iPhones anymore.
Matthew: So while I think this is like a really good start, I, I do think a company is most likely going to come out and create a better product that operates like a phone has all the features your iPhone has today. But in a smaller form factor that is easier to use and kind of does everything for you What would that be?
Matthew: I have no idea if I hey if I did like a
Brent: handheld
Matthew: device towards that likes The the glasses or if I knew what it was Brent, I wouldn't be sitting here on this podcast I'd be going up and down Silicon Valley trying to raise money to start the company right because
Brent: some people are thinking like they're gonna like change people's brains and like You know, there's a lot that can go into the thought process about all of this, but I'm assuming it's some sort of device.
Matthew: Yeah, it'll definitely be a device. I'm just not sure if we'll be using iPhones, you know, five, six years from now.
Brent: All right, let's get into the retirement planning corner. This has been one of the strategies that I've used for, since I even began my career in this industry. And it is something that we implement with many, many of our clients.
Brent: When we're starting to look at how are we going to plan out retirement? How are we going to plan out getting your distributions from your retirement accounts, whether they're post tax pre tax. Based on any of the tax implication it has on your withdrawals. And how do we actually efficiently manage the investment strategies to make sure that you have the money that's going to last you the rest of your life planned out accordingly, because there's a lot of strategy that needs to go into it and it can be an overwhelming or somewhat complex.
Brent: But when we break it down with clients and we do these things with clients, you know, you can simplify this very well. Tell us a little bit Matt about, you know, some of those short terms, midterm, longterm buckets and what, how do you actually plan out buckets?
Matthew: Yeah. So what bucket planning is, is there's, you know, let's, let's picture three bucks buckets, or you could picture, you know, three cups, if that's easier for you.
Matthew: And in cup one, you're really setting that cup one up with your stability funds. In cup two, those are your income generation funds and then cup three. That's your growth potential funds So we want to look across all your assets and we're going to set up, you know, these three different buckets and every investment or is going to have a purpose in there to fill each bucket up.
Brent: Right. So what I think that means too is like, let's say you had a million dollars and let's say that. We broke that up into thirds and let's just for numbers sake, just say that's 350, 000. You're putting 350, 000 into a short, potentially that amount of money into a short term bucket. That's full of like short term bonds and some cash and money that you're going to use in the next one to three years of retirement.
Brent: As you start taking your distributions out to spend it. And, and that money is going to dwindle down. So that bucket is the bucket that you're pulling money out of. Each year to sustain your lifestyle. So again, another example is you have social security, let's say it's 5, 000 a month, but your expenses are 10, 000 a month and you need that extra 5, 000 a month to maintain your lifestyle.
Brent: The next three years of your money is potentially in that short term bucket at very low risk. Because you're going to be using that money in the short term. And
Matthew: you're not going to make a lot on this, right? Like these are very short term investments. They're not going to appreciate. It's really just your liquidity.
Matthew: And the reason you do this, this is really important is because when there's a 2008 crash, when there's a 2020 crash, when there's a 2022 crash in the stock market, right? Those, those are all the major market crashes we've had over the last few years. Your money's safe. We know your income safe for, you know, three years.
Matthew: So you don't worry about the stock market crashing. You don't worry about what the bond market's doing. Cause you know, your income's there, your gap is covered. You're fine.
Brent: The midterm bucket is another bucket. That's interesting because now you're starting to think a little bit longer. Your duration now for that money becomes four to 10 years, because that's not money that you're going to use until the short term bucket is actually diminished and gone, then you start leaning into that next bucket.
Brent: And that next bucket, when you're thinking about a four to 10 year window, you're still not thinking about high risk stocks. You're still not thinking about a hundred percent equity. You're now thinking about intermediate bonds. balance funds, dividend paying stocks, things that will have a little bit more risk to it.
Brent: They're a little bit more interest rate sensitive. You have a higher growth potential in it, but that's still not your long term bucket. That's your middle term bucket.
Matthew: Yeah. So this is where we're generating income, right? We're using generate, Income generating assets, like you said, intermediate bonds dividend paying stocks.
Matthew: We want to get some interest on this. What's funny about this bucket is this bucket's really important usually in, in retirement planning, cause it is where you're getting that you know, that, that safe passive income from. That said most people today like the short term bucket, right? They want all those bonds paying 5%, but they don't want anything in the intermediate term when the bonds are paying 4%.
Matthew: So we're, we're in this kind of weird area with bucket planning to
Brent: point that out. I think the middle term bucket is probably the hardest bucket to actually plan out and pick and choose exactly what investment should be in there. Yeah. Like our
Matthew: clients are asking us constantly, Hey, let's sell the bond.
Matthew: That's in the
Brent: middle
Matthew: bucket. Right. Cause it's not doing that well.
Brent: It's and the other one's doing really well. Right. Short term is actually doing better sometimes than intermediate. And, but you have to play. The longer game on this bucket.
Matthew: Exactly. And what's important here is we've been talking about this fed interest rate cut now for what, nine months, 10 months.
Matthew: Hasn't happened yet. The bucket you're going to want to be in where you're going to want you know, your money when the fed cuts interest rates is this middle bucket you're talking about. Yeah. That's the
Brent: one you don't
Matthew: dive out
Brent: of, right? This is the one that's going to do the best. The long term bucket is the fun bucket though.
Brent: Right. Cause that's when you can speculate a little bit more. You could take a little bit more risk. It's the stuff we all like it's growth. It's built on long term holdings. It's built on the, the overall stock market could be individual stock picking, it could be picking an overall S and P 500 fund.
Brent: It could be picking the overall market. It could be global, could be emerging markets. It could be small caps and mid caps. It could be all of these different types of. Investments, but this is the fun bucket to make money.
Matthew: This is the bucket that advisors talk about the most and are judged on by their clients.
Matthew: It's where the growth happens. You know, the Nvidia, the Tesla, Apple, your index funds you know, this is where you're going to make your money. This is where we're going to get that appreciation from the stock market and capture those gains over the long run. You know, and we take a longer approach with this money.
Matthew: So you could even set it up where, you know, on some of your tax advantage accounts, we're going maybe a hundred percent stock or 90 percent stock so that we know these are going to grow the most over the amount of time and we're not going to pay taxes on these when we need the money,
Brent: the goal of this bucket.
Brent: Is beyond 10 years and that means by the time that you're done with the short term bucket and the time that you're done with the middle term bucket that the long term bucket has come back to the original value of what you originally started when you started these distributions and essentially you start the process all over again.
Brent: So, by the time you finish out the short term bucket and the middle term bucket, your long term bucket is now 1, 000, 000 again, and you repeat the process.
Matthew: That's perfect. So, I'll tell you about a client I've been working with he's got 2, 000, 000 retired. About 1, 000, 001 in his 401. And then the rest is pretty much split evenly between a taxable brokerage account and a Roth IRA.
Matthew: So what we did is we're actually pulling from the IRA right now to try and reduce his RMD when he hits retirement age. We set that up balance 6040 stock. In his taxable brokerage account and his Roth, Iowa IRA, we went aggressive or, you know, 80 percent stock in one 90 percent stock in the other.
Matthew: And we're just trying to let those buckets appreciate as much as possible. And then the in the IRA, that's where we're pulling money from. We're a little bit more conservative on that 60, 40 balance.
Brent: I think there's a few more things with this. One, you have to be very strategic with the investments you choose.
Brent: Because you have to know what investments go into which bucket and how to pick the right investments, like staying away from expensive investments that long term are going to impact your return, staying away from poor investments that aren't going to give you the return that you need. So I think that's one number two, I've seen advisors do this very poorly.
Brent: I've seen advisors try to do this with clients that have come in. And they have privately held reets that essentially were part of their long term bucket. And those privately held reets are literally worth nothing today. They went BK, they're under, they lost all their money, or they got pennies on the dollar and that money's gone.
Brent: So this can be done incorrectly and poorly. The other thing I think about all this is you got to manage emotion. Because if you do have a stock market crash, Your long term bucket could look very unattractive in terms of what it's supposed to be doing and what its value is, and that could be impactful, but you got to trust that process.
Matthew: Yeah, sure. Hey, well said. And like I was saying a few minutes ago. That midterm bucket right now doesn't look too good bond bond markets in three year bear market But i'll tell you what that midterm bucket's gonna look pretty good in three or four years
Brent: Yeah,
Matthew: so trust the process like you said Yeah,
Brent: I think whenever you're doing this strategy, too You need to work with an advisor on this because Although it can sound very complex.
Brent: I'm going to add another complexity to this If it's done right, it's, it isn't overly complex to me. The biggest thing about all of this though, is managing the buckets for tax efficiency, like you're talking about, because nowadays you have all these different accounts, right? You have an IRA or a 401k, which is all pre tax dollars.
Brent: So when you pull that money out, you're taxed on it. That reports on your tax return. That is ordinary income. Then you have a Roth IRA. Which when you pull that money out is tax free. So yes, we want to be tax free on as much of our retirement as possible. And then on the other bucket, the other potential investment that you have is after tax brokerage account.
Brent: So money that you've put in, you've already paid taxes on, but maybe you bought stock or maybe you bought mutual funds or ETFs and that money's grown. When you go to sell that though, You pay capital gains tax potentially on that, that could impact you tax wise. There's all of these now different types of accounts.
Brent: And now how do you manage each one of those tax implications? Like if you have a bucket full of Roth, a bucket of IRA money, a bucket of after tax money, now you're talking about Matt, create me three more buckets of. The bucket strategy of investments. Now you're talking about expanding your buckets well beyond with this.
Brent: I think what everybody needs to also to realize is that you're not just planning out the strategy of your investments, but if you have three buckets, Let's say you need 10, 000 a month from your investments. I'm just throwing a number out there. You probably don't want to take 10, 000 out from your IRA bucket because then you're going to pay on a 120, 000 is going to be your income from that bucket.
Brent: That is a lot. You're going to pay a lot of taxes, but let's say your Roth is good and you have a lot of money in your after tax account and you only take 30, 000 from your IRA. You take, you know, 50, 000 from your Roth IRA. You take the other 40, 000 from your after tax bucket. Now you're keeping your, your tax taxable income
Matthew: low, right?
Matthew: And an example of when you'd probably want to do that, right. Is let's say the stock market's been good. And then you could pull from that after tax brokerage bucket or that Roth IRA bucket, right? That's what you're saying. Essentially. Correct. And that'll reduce your taxes. Because you're not fully relying on your IRA.
Matthew: Correct. And I think where a lot of people get messed up is they don't have all three buckets. They don't have all three accounts. And then from there, you know, they don't have this taxable flexibility in retirement. So I think it's extremely important to have all three and then to use a bucket strategy inside those three accounts.
Matthew: I do think
Brent: that it's obvious that most people want to save as much money on their taxes as possible when they're retired, because every dollar you save is a, is a dollar you keep in your back pocket. But if you had 120, 000 of taxable income and you're in a 20 percent federal tax bracket, let's call it.
Brent: You're paying a suustantial amount of money to the IRS. That's not even counting state. If you're in the state of California. So you're paying a ton of money to taxes, but if you have three different buckets laid out Roth IRA IRA post tax money, you now potentially could pay no dollars in taxes. If it's done.
Brent: And this type of planning doesn't just start when you transition to retirement and start taking income. This type of planning can start when in your 40s, 30s, 50s, when you're now starting to think about where should I be contributing to? Do I contribute to my 401k? Does my 401k have a Roth 401k option?
Brent: Should I contribute to my IRA or should I contribute to a Roth IRA? Should I have a post tax money account going? When I look at the balance sheet for a client, we look at the asset allocation breakdown between different accounts of money. One of the most advantageous things I can see is Roth money and post tax money because that money gives us the flexibility for the client to keep their tax liability down in retirement.
Brent: And keep as much money in their back pocket.
Matthew: Yeah, personally, I love the post tax money, like a brokerage account. Roth is really good. Just my biggest issue with Roth is I want that tax deduction up front. Like you said, there's ways to plan to reduce taxes in retirement. I'd rather, you know, take the gamble trying to reduce taxes now and, and figure out how to reduce my taxes in retirement using other strategies.
Brent: I think for me, when I see people with Ross, because it has such a massive advantage long term, it is one of the last buckets we sometimes pull out of, because we're like, Hey, we could take out of that five years from now as it continues to grow. And people don't have the same amount of money in their Roth.
Brent: As they do in their 401k or their IRA. And so you start leaning on those other accounts, the IRA or the 401k money much more early on in retirement than you generally would in your Roth.
Matthew: Good point. You know, I think one question we get a lot from clients is, you know, how often should these buckets be reviewed?
Matthew: What's happening behind the scenes? How do we work with our clients on this?
Brent: So we're. Always managing our client portfolios. We have in depth software that we utilize that helps us manage allocation percentage and client portfolios and their financial plan. But also whenever we do our client meetings, we generally meet with our clients every three months, four months, or six months, depending on the client.
Brent: And when we're going through their financial plan and they're telling us about their updates, their goals, or what their expense changes may be, or. What big expenses they have coming up or what they see in the next two to three years financially, then we're making adjustments to these strategic plans and we'll make adjustments to them then.
Brent: And that's not talking about like investment, just investment change decisions, because those can happen based on market movement. I'm talking about the overall bucket planning, laying out investment strategy. Those can change based on goal changes.
Matthew: Yeah, ausolutely. And I think too, we also typically do it, you know, in the review meeting as well, right?
Matthew: So we're going to move some, some money into your short term cash bucket. You know, then we're going to rebalance the overall portfolio, put a little bit more into bonds, maybe a little bit less in the stock and go from there and you're off and running.
Brent: Yeah. And so something I did for a client a couple of weeks ago is they were doing a partial remodel on their house and I think they needed like 40, 000.
Brent: They said, where do we pull it from? And so I basically laid out for them. If we pull it from account one, this is what your expected tax liabilities can be. Here's how much you're going to have to pull out to get 40. If you pull it from bucket two, bucket three, bucket four. So I just specifically laid it out for them exactly what and how much it would cost if they took it from each bucket, just tax wise.
Brent: And then they were able to make the decision on where they actually wanted to take it from. And then they have the real data. They know what to expect. They're not going to get their taxes done. Like, Oh, now I have to pay X amount of dollars in taxes. I mean, it's all laid out. We knew exactly what to expect given, you know, the numbers.
Matthew: Yeah. That's so well said. And you know, if you're listening to this, you don't have a financial advisor and you're seeing yourself wondering why would I hire a financial advisor? Brent just explained it to you. Well said.
Brent: Yeah. I think there's just so many things that you can't, unless you're, they're doing it day in and day out.
Brent: For most people, you can't just calculate it out because it's so complex. There's so much detail to it. And even if you are able to, like there's things that you're probably not thinking about long term or short term there's impacts to all of these decisions.
Matthew: Yeah,
Brent: we have
Matthew: doctors, we
Brent: have accountants, we
Matthew: need
Brent: financial
Matthew: advisors.
Brent: So some things that do also impact distribution planning, planning strategies. Are things like what you already talked about, Matt, is your requirement of distribution. So the new required minimum distribution age is dependent on the year you were born. Right now, that is a range between 73 and 75. When I was in the industry, when I was starting out, that age was 70 and a half.
Brent: Then it got moved in the 2020, I think, to under the secure act of 20 to 72. Now it's 73 to 75. And they've moved that requirement of distribution age further along. So now you don't have to take it out as early in retirement without life expectancy, really changing all that much. But what they did do in a trade off is, is they said, if you pass away and your kids then inherited or your beneficiaries inherited excluding spouse, that you're going to have to now take that money out quicker.
Brent: You, the kids have to take that out over a 10 year period versus over your life. So although they expanded yours out, they've actually changed and made it quicker for the kids. So that's one thing that can impact distribution planning. Plus also, which is a hot topic, Matt, both on social media. And you hear a lot of advisors talking about is Roth conversions.
Matthew: Yeah, I'm not a big fan of Roth conversions. I think they could work in certain scenarios. I think they work really, really well in your sixties. So if you want to retire early, you could build Roth conversions into your plan. But for the most part, what I find is. You know, most people don't want to pay taxes.
Matthew: Like who are we kidding? And if you're going to do a Roth conversion, you're going to pay a big tax bill. Therefore most people are like, ah, forget it. I don't want to pay the tax bill where I do think Roth conversions could be slightly beneficial is if you're working very, very closely with an advisor and a CPA or an enrolled agent, and you are converting up to tax brackets, meaning I am in the 15 percent tax bracket right now.
Matthew: In five years, I'm projected to be in the 20 percent tax bracket because of the RMD or because taxes are going to raise, I'm going to convert a chunk of money, not too much, you know, maybe 20, 30, 000 to a Roth right now, pay the 15 percent tax instead of paying the 20 or 25 percent tax down the road.
Brent: Yeah, I think it's very specific.
Brent: It's unique to somebody specific situation and it sometimes makes sense, but sometimes it doesn't. I think one of the other aspects. To doing bucket planning. You know, I think one thing to clarify with bucket planning is this could sound like, Hey, do I need eight buckets? Do I need 10 buckets? Do I need 10 different accounts to manage all these distributions, these investments, this distributions you don't.
Brent: You need one Roth or one IRA. You need one after tax brokerage account. This all gets managed internally within that one portfolio. We just have very specific investments that we have set aside in that that's kind of layered for these different. Terms in life, short term, middle term and long term. And so you don't need 10 accounts to actually manage it.
Brent: You just have to have an advisor who's knowing how and what they're utilizing each investment for and what they're earmarked for.
Matthew: Yeah,
Brent: exactly. And then some of the last couple of things I think on this is, you know, tax loss harvesting, that's a big one, right? Because you're selling investments at losses to try and set some investment gains, and then sometimes we kind of add this other bucket, which we had talked about on our long term care podcast.
Brent: Or we could be putting money into this separate bucket. That's even more risky than the long term bucket. And you're setting that aside for 30 years from now, in case you need nursing home care, home health care, that you're putting this money in a hundred percent stock, you know, if you put, you know, 20, 000 in NVIDIA 10 years ago, I mean, you got your long term care taken care of.
Brent: A lot of people didn't do that though. Yeah. Hindsight's everything, right? We would all put a lot more than 20 into NVIDIA if we could. Do you have any parting thoughts? No, I think this is a great strategy. I think it works. I think it has to be done correctly. I've read books on it before. I've, and those books have led me down a path to think that some people don't do it actually correctly.
Brent: You have to be very careful with what you say. Real estate investments are certain types of investments that could blow the strategy out of the water, but when done correctly, very, very effective.
Matthew: Yeah, the investments are cash bonds and stocks. That's all you need. Simplify. Keep it simple people. Do you have any closing thoughts?
Matthew: No, i'm closed. What do you have for evermont recommends? All right. So on the recommends today, I'm going to go with a Netflix movie. It's called hit man. It's got the hottest actor in Hollywood right now. Brent, do you know who Glenn Powell is? Yeah, this guy is so good looking. He's in every big movie right now.
Matthew: So he's, and he's on Netflix. He's in hit man. He's also in Twister. He was in the gosh, I'm trying to blink on the name Top Gun. He was in Top Gun two. That was like a really hot movie in the summer of 2022. I think he was in a movie with Sidney Sweeney little rom com. So this guy's super, super hot right now.
Matthew: He's blown up. I think he's the hottest actor in Hollywood. A hit man, great movie. Check it out on Netflix. It's streaming now.
Brent: Interesting. I'll have to check that out. I also have a recommends last time we did a, I was going to recommend this last time, but we were doing the saving money. And so I didn't want to recommend something that was going to be super expensive, but one thing that I've I recommend is I have a new Jay Hilburn guy and what Jay Hilburn is, is it's a clothing company that does tailor made clothes.
Brent: So one of the challenges I think with a lot of people buying clothes is that it's when you buy off the rack, it doesn't usually fit. You know, you're, even if you're buying your sizes, it's not always going to fit. Well what they do is they take all your dimensions and then you pick out the materials you want and the clothes that you want and it comes to your, your house, you know, made to fit you already.
Brent: You're not having to do a bunch of work to make sure it fits. I like that because everything that I have, I tailor it, even if I bought something off the rack, I'm going to have to tailor it anyway, because it doesn't fit me and nothing ever fits me the way it comes. At least it doesn't fit me the way I want.
Brent: And so then you add costs to that by getting it tailored, which is more expensive. Instead, I could just go to a guy that's already getting me tailored clothes. I save the tailor costs. I'm basically paying the same thing as I would to have my, an off the rack pair of pants getting tailored.
Matthew: Yeah. Brennan, I think all your clients listening would agree with this, that, you know, you dress really nicely.
Matthew: Yeah. So it would make sense that you are going to a custom clother who's also a tailor. Paulina and I were saying the other day that the best dressed in the office rankings. Do you want to know what they were? Yeah, let me have them. You number one. Paulina second. Paulina number two. Me number three.
Matthew: And Josh four.
Brent: Yeah, I mean, it's just, you know, it's, it is the amount of time that you put into it, but I, you know, I feel that if. You wear clothes that fit you and they're good materials. I mean, you're, you're going to present to your yourself about yourself better. Yeah, totally. And that's helped you a lot in your career.
Brent: You look great, by the way. Thank you. So do you, Matt? So I have my guy, James, I was just going to recommend him out. His number is 909 675 7676. James is my Jay Hilburn guy. Great. Got me fitted. Got me hooked up. I like the way that my, my suits are coming out and so I'm trying to up my game a little bit.
Brent: Looks great. All right. So as advisors are passionalized and assisting others, it's our very reason we've chosen this path. For those interested in arranging, arranging a meeting with us, for those of us interested, for those interested in arranging a meeting with any of our team members, please visit Evermont to book your complimentary consultation.
Brent: Additionally, we invite you to download our ebook directly from our weusite, offering further insights and guidance. And if any of us are your favorite, please go on our weusite, book a meeting with us. We'll do a consultation. That's always free. We'll go over some of the social security planning stuff.
Brent: We talked about, we'll kind of get your goals and we would do any retirement planning stuff that you guys have. So please feel free to reach out at retirement plan, playbook. com or on our weusite at evermont. com.
Matthew: Yeah. And I got one more thing to say. Please give us a follow on Instagram. We want to get our followers up to over a thousand.
Matthew: It's just Evermont wealth. We're putting a lot into our videos every month, 10 new videos coming monthly. So it's a lot of work. We want this project to be successful. So you know, please give us a follow, share it with your friends, share it with your kiddos. We're trying to put out some really detailed retirement planning videos, but then also some general videos to help help people out as always.
Matthew: Thank you for listening.
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