Welcome back to The Retirement Income Show.
I'm Mark Elliot, here with well respected retirement wealth advisor
and certified financial planner, Troy Sharpe of Oak Harvest Financial.
It's a local family owned firm, Troy the CEO and founder, and of course, A plus rated by
the Better Business Bureau of Houston.
You can always go to the website to find out more.
Oakharvestfinancialgroup.com.
The office is located at 920 Memorial City Way, right off I10 in Bunker Hill.
You have questions, you can always call 800 822 6434, no cost, no obligation for just
having a chat.
It's easy to do.
It's 800 822 6434.
Then of course the YouTube channel, Troy's got over 100 videos there.
You can subscribe, which will give you the reminders that, "Hey, there's a new video out."
You don't have to though, you can just search for Troy Sharpe and Oak Harvest on YouTube.
Have that opportunity as well.
We talked about a lot of different things today.
We're going to get into some mutual funds and tax drag on mutual funds that I don't
really understand because, look, I have the opportunity, at 61, to talk to Troy every
week on this program, but I do not work in the financial world.
This is a great show for me to gain knowledge, which I hope it's the same for you,
but when you think about the marginal gains,
coaches always say, "We just want to get a little bit better
tomorrow than we were today."
Is that an easy thing for people to understand, Troy?
Because to me, I would think we're conditioned about the rate of return, so if somebody said,
"Hey, Troy, what kind of rate of return can you get me?"
Then you say, "Well, it's not really about what rate of return I can get.
It's what rate of return you need."
That's a totally different way to look at it.
Exactly, and that's why I spent so much time on that psychological shift on the last segment.
I brought some personal things in there because those are important to me that you start thinking
about not just the money in retirement, but we want people to have happy retirements,
secure retirements, and you have to be prepared.
One of the biggest misconceptions about retirement is the whole notion on returns mean everything.
Yes, your returns are important, but when you look at everything else that goes on
in retirement, income needs, social security, Medicare decisions, inflation, taxes, having
multiple streams of income, the survival rules when one spouse passes away, you lose a social
security check, you go from the married filing jointly into the single tax brackets, so many
different things need to be planned for in retirement.
That yes, returns are important, but I tell you this, if you need 10% a year in retirement,
you should not retire, you simply have not accumulated enough money.
Retirement is not about the greatest returns.
Returns are important, and of course you want an efficient and effective investment manager,
but you want to manage risk with a greater emphasis on managing risk than on achieving
very, very high returns, because, one, you don't have as much time to make up for losses.
Two, the sequence of returns risk can destroy your retirement.
What is the sequence of returns risk?
If you're focused on returns, you have to take risk.
If you want 10% a year, you have to have 60%, 70%, or no, excuse me, closer, probably 80%,
90% of your money in the stock market.
Historically, if you had 100% of your money in the stock market, and you look at the best
10 year periods historically out there, sure, you can average 10% to 15% a year.
We're coming off a period where the stock market over the past 10 years averaged 15%
per year.
Guess what?
You had to take a lot of risk.
In retirement, you don't want to have 100% of your money out there in the market.
Sequence of returns risk is, if I take out 5% to live on for income, and the market,
or my portfolio goes down 15%, okay, I've taken 5%, I lost 15%, I'm down 20%.
If I have a million bucks, I'm down to 800,000.
I lost 20% of my life savings in one year.
Year two of retirement, if I still need that 5% income.
Doing the math, 5% on that million was 50,000.
Now your portfolio has dropped to 800,000 because of sequence risk.
You still need 50,000.
You actually probably need 52 because of inflation,
but I'll keep it simple at 50.
50,000 on an $800,000 portfolio is about 6.3%, 6.4% somewhere in that range.
Now we're taking a larger percentage distribution because our portfolio values have dropped,
but guess what happens if the portfolio goes down again in year two.
You've taken now, let's call it 6% out, but let's say the market doesn't react positively.
We're in a recession and the market or your portfolio is down another 15%.
You've taken 6%, you lost 15%, you're down another 20%, 160,000 off your 800,
now you're down to about what, 640?
Two years in this example, you've lost the.
the market went down 20% and 15% or your portfolio lost 20% and 15%.
You've lost darn near 40% of your entire life savings because of the sequence
of returns risk.
In retirement, investment returns are important, but risk management is equally important.
Risk management and investment returns are only one teeny, tiny slice
of the retirement pie.
You need a custom designed portfolio that's meant to generate income.
Then that income generation plan needs to be focused on how are we going to reduce taxes?
What are the best tools?
What are the best strategies, not just to reduce taxes today, oftentimes, it makes more
sense doing a Roth conversion strategy where you're going to pay more taxes today in order
to pay many or much less tax over the course of the next 30 years.
That investment plan that manages risk and is focused on generating some returns,
that plan is also focused on generating income.
All that needs to be wrapped around a plan to reduce taxes.
Then we also need to focus on estate planning, if you have any significant amount of wealth
in this country.
I'm not talking about your will and your living trust, and those types of things.
I'm talking about how do we strategically plan to get the money that you've saved over
to the next generation without the government reaching deep into your pocket and taking
40%, 50%, 60%, 70%?
Yes, if you have money inside your retirement accounts, and you've accumulated money, you
could possibly owe income taxes.
Well, you definitely will owe income taxes, the kids will, on those funds, all retirement
accounts must be distributed within 10 years of death when the children inherit them
or grandchildren.
Then also with the change in the federal estate tax law that's upcoming for families that
have done a good job saving and building wealth and working hard and whether you had a business
or you invested well, or whatever your situation is, yes, you are looking at federal estate
tax possibilities as well.
That's how you get up to 60%, 70%, 80%.
Then if you live in a state that imposes an income tax or an inheritance tax, now we're
literally getting over 70%, 80% of everything that you've worked your entire life for being
taken without proper planning.
If you've got $500,000 and you pass away, you still have to deal with the income tax
if it's inside your retirement account, but the estate tax stuff does not apply to you.
Everyone's situation is different.
The point is, you asked me, Mark, about the marginal gains here in returns and retirement.
In classic fashion here, I talked about everything else that we need to be focused on in retirement
because those are the things that will help you not run out of money.
Those are the things that will make sure that you pay less tax in retirement.
If you pay less tax, that means you keep more of your money, that means you're going to
be better to fight inflation and the erosion of your purchasing power.
If you have multiple streams of income, you're going to sleep better at night, because if
the market goes up or down and these income streams aren't dependent on the market growing,
you're going to sleep a lot better.
It's a lot easier to deal with a 25%, 30% market correction when you know your income
doesn't change, if that's $80,000 a year for you or $150,000 a year for you.
If those paychecks, your social security, whatever private investments you've made,
if the market drops 30%, and your lifestyle doesn't change, and will never change because
of that market drop, you're going to sleep a lot better than the person who just has
60, 40 stock bonds and some mutual funds and now the portfolio's down 30% or 20%, or whatever
the number is, and they're depending on that rebound to continue their standard of living.
If this sounds reasonable to you, if this sounds like an approach that you want to explore,
you're going to give us a call at 1-800-822-6434.
You're simply going to leave a message.
You're going to leave a message, and Frank's going to give you a call back on Monday.
Frank's going to see if you're a good fit for our retirement 360 process and what we
do here at Oak Harvest Financial Group.
If what I'm talking about is appealing to you and you feel like you need those services,
you're probably a good fit, at least initially, to go through this process.
We're simply going to sit down, have a cup of coffee, have a cup of water, and understand
what's important to you.
We can do it over the phone on that first visit as well or through Zoom, but reach out,
1-800-822-6434.
The tax drag mark is the question you originally asked me and I wanted to bring this up on
this week's show because there's new research out there.
I've been underestimating over the years,
I think most professionals have been underestimating
the tax drag that mutual funds have on your overall wealth.
Depending on your tax bracket-- Well, first let me set up what tax drag is.
This is one of the reasons why I've never ever been a big fan of mutual funds.
First off, mutual funds have a lot of hidden fees typically.
If you're working with an adviser, especially a broker, you're most likely looking at some
type of upfront charge or exit fee on your mutual funds.
Some of these mutual funds, 3%, 4%, 5% just to purchase.
That's not good.
That's why typically there's a lot of firms out there, big firms that this is all they
do, is they put you into these mutual funds where you have these big upfront fees.
Besides that, you have ongoing fees, you have 12B1 fees, you have expense fees,
you have various administrative fees.
A lot of times when we do a hidden fee analysis on mutual fund accounts, we'll find anywhere
from 75 basis points to 2 1/2% of fees inside that mutual fund, which typically are in addition
to any fee that your advisor is charging.
Tax drag on mutual funds.
Mutual fund managers buy and sell stocks throughout
the year or bonds for that matter,
depending on which type of fund you have.
When they do that, if they create a capital gain at the end of the year, all of those
capital gains pass through to you, the mutual fund owner.
Depending on your tax bracket, this new research is showing us that anywhere from about 1.2%
to about 1.6% per year in reduction of returns is due to this tax drag.
That means that if you have a 1% mutual fund fee, you're paying your advisor 1% and the
tax drag is, let's just call it another 1%, that's 3% a year, essentially that you're
losing in performance from the mutual funds.
I just wanted to talk a little bit about that
because it's important to understand how inefficient
mutual funds are.
Index funds as well.
Index funds aren't quite as bad as mutual funds, but also you're looking at around 1.2%,
between 1% and 1.2% depending on your tax bracket, tax drag from index funds or ETFs
that, again, when the index gets rebalanced, things are bought or sold, those capital gain
distributions flow through to you.
ETFs typically have a bit more activity.
This tax drag is something that we need to be aware of because when we have these hidden
fees, they can eat away at our returns.
When you're paying a fee to an advisor, that's one thing if you're receiving the value, if
you're receiving an income plan, a tax plan, an investment strategy, and all of this stuff
is working together, that's valuable, that's worth paying for, but you don't want to pay
2% just for an investment strategy in hidden fees and elsewhere.
1-800-822-6434.
Visit us on the web at oakharvestfinancialgroup.com
and check out the YouTube channel.
Go to YouTube, search Oak Harvest.
1-800-822-6434.
Investment advisory services offered through Oak Harvest Financial Group LLC.
Oak Harvest Financial Group is an independent financial services firm that helps people
create retirement strategies using a variety of insurance and investment products.
Investing involves risk, including the loss of principal, any references to protection
benefits, or lifetime income, generally referred to fixed insurance products, never securities
or investment products.
Insurance and annuity product guarantees are backed by the financial strength and claims
paying ability of the issuing insurance company.
Oak Harvest Financial Group LLC is not permitted to offer, and no statement made during this
show shall constitute tax or legal advice.
You should speak to a qualified professional before making any decisions about
your personal situation.
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