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 representatives, Securities offered through Cambridge Investment Research Incorporated, a broker-dealer, member 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 CareOS. Well, this is Nate Kreinbrink bringing you today’s show. Little wet out there today. We got a nice little front passing through this morning. I’m going to give us some more of that rainfall coming down. Looks like the heavier stuff might be heading just a little bit south of us, but probably still in line to get a decent amount of rainfall, probably a few nice little thunder lightning clacks out there. But again, be careful, look at the warnings. Again, sometimes those change. But again, with where we were at early August like this with the humidity we’ve been having the last few weeks, I guess definitely not a surprise that it’s ending with some of these storms like this, but hopefully we get through these next few days of potential rain storms in the forecast that it brings a little bit cooler temperatures and not that high humidity that we’ve been having.
So again, it’s going to be wet, looks like the next few days. So that grass is definitely going to green up. So if you’ve enjoyed the not having to mow your grass, I guess, with it being a little bit brown for a little while, it looks like that’s going to be ending because it’s going to definitely going to green up with where we’re at just in time for everyone to start thinking of back to school shopping. I know it’s hard to believe that less than two weeks, everybody probably in the area will be back in session and get back into those final school routines, I guess you would say. Again, enjoy it. Again, be careful, watch your warnings and again, get ready to start mowing grass again, I guess.
Today’s program, again, next week we’ll be having Andy Ferguson on Talking Taxes, but wanted to talk today just a little bit in general, the overall concept, I guess, as far as what we do on a daily basis and what we do as far as each show that we bring to you every Wednesday morning. But again, we usually dive down specifics, but look at it from a general standpoint today and that’s just planning or I guess you could say preparing for retirement.
I know Andy always talks a lot of times as far as planning for taxes or preparing taxes for retirement. It’s the same concept there is it’s not something that just happens overnight. The earlier that you start thinking about putting yourself in a position to be able to make that decision to retire, more often than not, you’re going to be in a position where you can make that decision and make that decision confidently that you’re going to be able to be able to transition into that world. Because, again, there’s a lot of adjustments when you go from a daily routine of getting up and going to work, going to your job with a steady paycheck coming in, oftentimes saving into a company retirement plan, to a world where, okay, we’re not getting maybe that necessary guaranteed check from going to work every day. I’m not putting money into my accounts. I’m potentially taking money out of those accounts. Again, how do I take this pile that I’ve worked so hard to save?
That’s a reality of where everybody is at today is, again, everyone focuses on saving, saving, saving. You got to save into your company retirement plan, get the match, save on the outside, pre-tax, Roth account. What are you invested in? Again, and all those things, rightfully so. But again, you amass this pile of assets that you saved and then what? And then no one really talks about how do we unwind this pile? And when I say unwind it, how do we essentially pay the least amount of tax on what we do? Because again, it is very common for people to retire and the biggest part of their assets that they have saved entering into retirement are pre-tax assets, meaning that they got the deduction, the company got the deduction with the match when money went into it, but when they take it out, they have to pay taxes on it. Anything that that money has earned from the day that they put that dollar in to the day that they take that dollar or whatever that dollar has turned into, they have to pay taxes on it.
So again, at what rate? Well, that depends on what other income they have. They will pay taxes at whatever tax bracket rate that they are in, adding income to whatever else income that they have coming in.
So again, when you start looking at it really is important to have a plan, I guess you would say, as far as how we’re going to unwind those tax deferred assets, because again, that’s what everyone always focuses on. Again, how much do you have saved? Do I have enough saved for retirement?
Well, it’s really hard to answer that question. And again, when I get that question, when I meet with people, whether it’s for the first time or we’ve been talking about it for a while, the question that I always respond with is, “Well, how much do you need?” Because the answer to that question that I just responded to them with is going to determine the answer to that first question that they ask me, because again, if you go by your retirement planning by what you have, it’s going to, again, possibly limit what it is that you can do in retirement, what it is that you can spend in retirement. If you look at it from what do you need to basically fund your retirement, what do you have for bills, utilities that you know you’re going to have? What debt do we have? Do we have any debt left on a mortgage? Do we have any debt left on a vehicle? Do we have any debt left on a credit card? Do we have any other outstanding debt that, again, that we’re going to have to deal with?
And then what is it the lifestyle that you want to lead or leave when you transition into that world? I mean, do you want to travel? Do you want to do certain things as far as what it is that, again, that lifestyle that you had envisioned in retirement, what does that look like? And when we get the answers to those questions, we can take those answers and then we can back into how much they’re going to need and are they prepared to fund that retirement with what they have coming in as far as assets?
Again, looking at taxes, I mean, the big perception is that you’re going to be in a lower tax bracket when you go into retirement than you are when you are working.
Concept-wise, again, you can see where that possibly makes sense, but in reality, it’s not always necessarily as cut and dry as what people think it is. And a lot of times, they’re very close, if not in the same tax bracket in retirement as they were when they were working. So again, if we’re looking at that and it’s the same tax while I’m working in the same tax so that I am in retirement when I take that money out as far as a tax-deferred account with those distributions, what does the planning look like? And that gives us a little better idea as far as what that planning will look like, not only in retirement, but in those years leading up to it as far as what we can do.
The other part of the equation is that, again, when you look at retirement income, retirement income is not necessarily the same as wage income. And what I mean by that is that if you have $4,000 worth of wages that you have coming in and say, “Hey, I need $4,000 worth of retirement income,” well, that $4,000 worth of retirement income is technically worth a little bit more than what wages is. And then how I go about looking at that is when you have a paycheck, if you look at, okay, I get paid X amount of dollars an hour, so my gross pay is this. Now I take out possibly my retirement plan contribution. I take out FICA taxes, I take out federal taxes, I take out state taxes, I take out possibly some other things that you have coming out of each paycheck, well, I get 4,000, but I usually only bring home maybe close to 3,000.
Whereas when you look at retirement income for the most part, the majority, again, of your retirement income is really only subject to federal tax, whether it’s IRA, 401k, pre-tax distributions, not subject to state tax in Iowa or Illinois. You look at pension income, again, not subject to state tax in Iowa or Illinois. You’re not taking FICA tax out. You’re not taking retirement income contributions out. So again, you don’t have as many deductions from a tax standpoint than you do when you have wage income. So again, when you start to figure that, I mean, you had 4,000, you netted three, again, you may not need to take out the full Ford and net the three or however it is, but again, understand that, again, dollar for dollar, they’re not necessarily the same as far as when they carve for all those taxes that are taken out of it. Again, a lot of things to think about when you’re starting to look at that.
Another big part of it that I think oftentimes gets overlooked, and again, not necessarily one that some people even think of, but again, just the psychological hurdle of transitioning into retirement. I talked a little bit as far as some of those changes, as far as, again, changing a routine. For a lot of people, I mean, that’s all they’ve known is getting up, going to work for 35, 40 years or more of their life. Now they’re getting to a point where, okay, I don’t really have that to get up for. What is my, I guess, reason to get up? What is my purpose to get up? And a lot of times when I say that, I mean, people look at me like, “Well, I’m not going to have any problem with that.” And you may not early on, because again, what you oftentimes see is that honeymoon period, that like, “Oh, this is great. Nothing to do. I can get up and do nothing.” Well, that honeymoon phase of just doing nothing, not really having anything to do for the day, a lot of times it gets old for people after the first month or two.
So what I always tell people is look to find a way to replace that purpose of what your daily, I guess, again, reasoning is for that. And again, it’s different for a lot of people. It’s not the same for everybody. It may be a hobby that you’ve always wanted to do or you love to do, but just never had time to do. It may be part-time work. Some people go back to work part-time just because of they like to have that scheduled on their calendar where I’ve got to be somewhere at a certain time every day. And again, they’re choosing to do that, not because they have to in a lot of times, but because they want to. And again, psychologically, as I keep reiterating here, is a lot different to be able to choose to do that instead of feeling like you’re forced to do that.
The other thing is, I mean, sometimes people volunteer. Sometimes they spend more times with grandkids, family members, friends that they maybe not have had time to do. But again, it’s replacing that purpose from a psychological hurdle, getting into retirement. And again, a lot of times, people don’t think of that or they downplay the importance of it or the magnitude of what that is as they transition into it.
So again, if you’re getting close to retirement, thinking about doing it, give us a buzz and be happy to sit down and just have a discussion and put stuff out on the table and making sure that we’re prepared, because again, it’s a great feeling going into it and making that decision with a confidence level that you can make that work as opposed to just hoping, crossing those fingers and hoping you can make it work. A scary thing, especially in today’s economy with where things are at. So give us a call. I’d be happy to help out.
I did want to mention real quick here before we run out of time that every month the NelsonCorp team is featuring a new charity of the month. For the month of August, we are focusing on the White Oaks Therapeutic Equestrian Center in Morrison.
Again, this is Nate Kreinbrink bringing you this week’s Financial Focus. Thanks for tuning in and 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 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.