Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA SIPC. Investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning. And welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink, bringing you today’s show. Another pleasant Wednesday morning out there. I had seen last night on the evening news that we touched a record high yesterday at a 71 degrees. I don’t know if we’ll quite get that warm today, but again, hitting the sixties again, maybe a little chance of rain, but again, coming off of just a few short weeks ago, where it never seemed like it was going to get here. Definitely a pleasant surprise and definitely much wanted to get rid of all the snow that’s out there, transition to that next season. And I think everyone’s ready to see the green grass. If you’re like me, you would rather much rather mow than to get the shovel out to pull that cold stuff around. Hopefully it continues on, although we have a little cold spell coming. Hopefully it won’t be a too long lived and we’ll continue to see those temperatures increase.
Nate Kreinbrink:
For today’s show, I know we’ve talked to some of these topics over the last couple of weeks with James, tax planning with either Andy Ferguson or Mike VanZuiden with NelsonCorp Tax Solutions, but just kind of wanted to go through just the questions we get. And it seems like we’ve been having a lot of these meetings lately, as far as individuals thinking about retiring in the near future, whether it’s a midsummer or I’m thinking of going at the end of the year or next year, whenever the case may be. It just seems like those have been some of the questions we have and just wanted to spend some time on the program today and going over some of the questions, some of the topics that we sit down and try to go through so people when they do make those decisions, feel like they have all the answers on the table to be able to make an educated decision on if they’re able to do that.
Nate Kreinbrink:
When some people transition, obviously from the working career where they’ve done for 30 probably plus years, into that next phase as far as retirement, it’s a daunting task and obviously a difficult decision, not just for sometimes the cashflow and what it is, but just psychologically how that’s going to impact them. And sometimes that’s the biggest hurdle people need to get over. Again, having all the answers out there, having a decision made and knowing that I’m making the right one, that I’m not going to have to go back to work because I have to. If I do decide to continue working, it’s because I want to. And it’s a big difference when you start answering some of those questions and how people feel about that. But I think the biggest question when we sit down with people, when this topic comes up, is are they going to be able to retire?
Nate Kreinbrink:
And again, the magical question that comes up is how much do I need to have? Well, that’s kind of a two sided question. And when I answer that back to the people that it depends, it truly does depend because most people want to factor in and focus on the amount of assets that they have. But they’re forgetting about the whole other flip side of that and it’s how much do you need? Because individuals that need more have some debt going into retirement are obviously going to have to have more in assets to be able to fund those. And likewise, the less debt you have, the less you’re going to need on a monthly basis, the less you may potentially need to transition into retirement and make it work. Again, looking at what we have versus what we need is always the starting point with it.
Nate Kreinbrink:
And then once you look at those two things, you kind of start looking at, are you able to make it work? Can I even retire? And if the answer is yes, then we start transitioning to, well, how can I maximize the assets and the income that I’m going to have throughout not just the first couple of years of retirement, but 10, 20, possibly even 30 plus years into my retirement? How can I maximize those? And we’ve talked to all the time as far as the two biggest expenses or two of the largest expenses in retirement are one, your healthcare cost and two, your taxes.
Nate Kreinbrink:
And taking a look and spending a lot of time on those two aspects really will help the overall situation. And if we can do some things to control what you pay for your Medicare premiums, if we can eliminate some of those additional taxes that come on top of Medicare for your income being above certain thresholds, looking at your taxes and if we can reduce them and get more money into the lower tax years, rather than being forced to take it out later on at higher tax years, it’s again, it’s only going to help you and benefit you as we go.
Nate Kreinbrink:
Another question that always comes up and always has questions around it, is for those individuals that are retiring and have a pension through work, do they take the lump sum? Or do they take the monthly installments? And if they’re going to look at taking the monthly installments, you usually have different options, whether it’s just a single life, a joint and 50% to the beneficiary joint, and a 100 or whatever the case it may be. Looking at those different options, understanding the different payout amounts of each one of those and really how that’s going to fit into it. Individuals taking a lump sum, usually it’s pre-tax money so we would roll that over to an IRA. It gives you a little more liquidity with it, but those monthly checks that are guaranteed with that pension aren’t necessarily there as much per se. But again, weighing the pros and cons of each, the liquidity, having the flexibility to control how much we’re taking out every month.
Nate Kreinbrink:
Again, it is all questions that individuals need to answer combined with again, what they need to live off of and how disciplined they are to again, if they roll it over to an IRA and not using it as a piggy bank, knowing that that money that we rolled over as a lump sum needs to be there throughout your retirement to fund it the way those monthly checks would be, if we would decide to go that route. Again, looking at all those different options, understanding it, understanding how it fits into the overall picture as again, is extremely important. And a lot of times people don’t necessarily comprehend the magnitude that all these decisions have and the impact that they have.
Nate Kreinbrink:
Nextly, we kind of look at the assets that you have. Again, if you were coming off of a job, normally you’re probably going to have a 401(k) that hopefully you’ve put into. And then any company match has been into throughout your working career. Maybe another IRA or Roth, maybe a non-qualified account that you’ve just been saving money into, but taking a look at those and really understanding that the differences in how each one of those is taxed. If we have a traditional 401(k) or a traditional IRA, you’ve got a deduction for any contributions that you put into it every year leading up to that point. In turn, you’ve got tax deferral during that time, but when that money comes out, it is taxable to you. Again, that’s added on to whatever your current income is. Any distributions are fully taxable to you when you take those out. Again, understanding that, that if you need X amount of dollars, you’re probably going to have to take out a little bit more to withhold some taxes in order to net the amount that you want to get.
Nate Kreinbrink:
When people start looking at that concept and knowing that if I need an X amount of dollars to buy a new car, to fix something at the house, it’s going to be a little bit more expensive than what I thought it is. It’s a little eyeopening sometimes to people. And then really looking at Roth IRAs. And if we have some or maybe looking at doing some conversions later on, which hopefully I’ll have time to talk about here at the end. But again, that money that you put into any Roth 401(k)s, Roth IRAs, you did not get the tax deduction upfront. You did not pay taxes on it throughout the time. As long as you’re over 59 and a half, the accounts have been open for longer than five years, anything coming out of that Roth will be completely tax free to you. That will not impact your overall income.
Nate Kreinbrink:
Again, different options. Understanding how they both fit into play. And again, if we can create different buckets that have different tax consequences to it, we’re going to be able to do a little bit more planning throughout your retirement and hopefully maintain those tax levels a little bit. Obviously, we talk about Social Security all the time, but it really is a big piece of the puzzle that you need to understand. Your benefit is determined by your 35 highest years of earnings. If you only have 33 years of earnings, they’re going to put a zero in when they factor your amount. If you have 38 years of earnings, they’re going to throw out the three lowest years. Again, they’re going to take those 35 years and that’s going to give you your primary insurance amount. This is the amount that you would get at your full retirement age. For those individuals born in 1954 or earlier, your full retirement age will be 66 and then it will incrementally increase. 66 in two months, 66 in four months, up until those individuals that are born in 1960 or later, your full retirement age is currently set at 67.
Nate Kreinbrink:
Again, the earliest you can take a benefit is age 62. It’s obviously going to be reduced. The latest that you can take it when getting the 8% a year increase every year from your full retirement age, up until age 70, would be the largest that your benefit would be above and beyond any cost of living adjustments that may go on there. If you’re married, we want to look at coordinating some of these benefits and really looking at your income and what they may be.
Nate Kreinbrink:
Obviously, healthcare is another big issue. If you’re retiring before age 65, how are you going to be able to get insurance up until you get Medicare age? Are you able to go onto a spouse’s plan if they are still working? Is there a program where you can continue the healthcare through a previous employer, which is getting rare. But in some instances I have seen that. Obviously COBRA’s out there, but we need to understand what that’s going to cost and the limits as far as the timeframe that we’re able to be on that. But again, understanding that question, because again, a lot of times people don’t think of that. They’ve just been so accustomed that their insurance is through their employer. I’m going to retire, oh, I don’t have insurance. Again, another big thing, because when people see the sticker price on that, sometimes it is a deal breaker as far as if people are able to retire. And if so, they’re going to need a little bit more to fund that.
Nate Kreinbrink:
Talked a little bit about conversions and we are getting close on time, but I did want to cover it today. Conversions is basically taking money from those tax deferred accounts, those traditional IRAs, your traditional 401(k)s, willingly paying taxes on it, and then converting it over to a Roth IRA. Now why would we do that? Because if we are in a lower tax bracket, say we retire, our income has stopped, our tax bracket probably went down that time as long as we don’t have a pension or turn on Social Security right away.
Nate Kreinbrink:
Again, we have money in those tax deferred assets that we know we’re going to pay taxes on at some point in time. Whenever we take them out, we’re going to pay taxes on that tax bracket. If we are in a lower tax bracket and with the way the current tax rates are right now, it probably makes sense for the majority of people to fill up those lower tax brackets. Willingly fill them up, pay taxes on it, get it over to a Roth. That gives you options that has you dictate as far as the amount in taxes that you are going to pay on that money rather than being forced to pay taxes at a higher level later on in it.
Nate Kreinbrink:
Again, a lot of planning that goes into it, a lot of kind of sitting down, going over scenarios, a lot of stuff probably new to people, but again, it needs to do because again, as we always say, “It’s not what you have, it’s what you keep.” And again, if we can keep more in our pocket and pay less in taxes, I’ve never had anybody that’s disagreed with me on that. Again, it doesn’t just happen overnight. It takes some planning. The earlier we can sit down and have these discussions with people, the better they’re going to be able to transition into that next phase of their life in retirement and make it work for them.
Nate Kreinbrink:
Again, basic rundown of some of the questions, some of the concepts that we go over. Dive deeper, obviously individually with everybody. But again, if you want to have these discussions and you’re getting to this point where you’re thinking about making that transition and you want to see if you’re able to or what you’re thinking and if everything’s on the table, give us a call. We’d be more than happy to sit down with you, start having these discussions with you before you enter into that time.
Nate Kreinbrink:
But did want to mention, we are out of time, goes by quick, but every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of March will be donated to the Arch of Clinton. Again, thanks again for tuning in on this Wednesday morning. This is Nate Kreinbrink with NelsonCorp Wealth Management. Have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer member of FINRA SIPC. Investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.