If you have $500,000, you must watch this video. And I'm going to show you what I
recently taught a financial advisor that changed the way he deals with clients.
Hi, I'm Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner Professional,
and host of The Retirement Income Show. Recently, I had a conversation with a
financial advisor -- and I've known him for a little while -- and he said, Troy,
I keep hearing you on the radio talking about taxes, and how important it is to do tax planning
and these Roth conversions and some of the other strategies you implement for clients.
He said, I don't get it. I've never done these Roth conversions. I've never seen the value in
them. Show me what you're talking about: why it's so important. So, I told him to come over to the
office, and we sat down right here in this room. And I went through what I'm about to show you,
and it changed the way he deals with clients. Many of you, you're watching this video, you
are either approaching retirement -- maybe you're in retirement -- or you're
saving and being diligent about putting money into your retirement account.
You need to start planning. You need to understand the impact that withdrawals
will have on your retirement income and your security later in life.
I'm going to go through two scenarios with you. The first one is a single female that has about a
million and a half saved for retirement and spends about $75,000 a year. Now we were able to help
get her retired a little bit earlier than normal. But one of the main reasons we were able to do
this was from the tax planning side of things. So real brief snapshot here: The two lines. One
represents her account balances -- we see the little one and a half million here. The green line
is her account -- estimated account balances -- if she does no tax planning. The blue line is the
estimated account balances with tax planning. So, we can see, if she does absolutely nothing,
with a little over a million five, spending $75,000 a year as a goal,
she actually runs out of money -- estimated -- far before
her plan ends. The blue line here, she dies with still well over a million dollars, estimated.
When we're projecting way into the future, there's tons of variables we have to take into
consideration. But one thing we can do is make everything static. So, everything being equal,
what happens in these two scenarios? And to me, this picture is very,
very clear. With no tax planning whatsoever, she is in jeopardy of running out of money.
Now two things, one, taking $75,000 out of our portfolio at the start of retirement,
we need to understand inflation, because 20 years from now, to get that same purchasing
power that $75,000 provides today, she's going to need to pull out about $130,000 or $140,000
because of inflation. The value of our money today is far, far greater than the value of the same
dollar 20 years, 30 years into the future. Why does this happen? First and foremost,
doing these Roth conversions, she is going to pay more taxes sooner -- when we know taxes are lower.
Right now, with the Trump tax cuts, we can take more money out of our IRAs than any time in the
history of your life and pay the least amount of taxes. We don't have a crystal ball, but it
is fair to assume that taxes will be higher at some point over the next 20 to 30 to 40 years.
So, what this does is: This simply looks at what we know now. In 2025 After that year when the
Trump tax cuts expire, we do know taxes are going up to how they were in 2017. What this simply
shows is: As time goes on, the amount of money that she is paying in taxes -- the green is doing
nothing -- versus if she does the tax planning. When we look at the amount of money she needs to
pull out of her account -- because of inflation -- that 75, it turns to $120,000, $130,000. She needs
to pull that out to live. But also, when you're starting to take $20,000, $30,000, $40,000 out
to pay taxes, you're increasing the distribution percentage from your retirement 2%, 3%, 4%. All
of a sudden later in life, you're pulling out 8%, 9%, 10 % because of taxes and income needs due to
inflation. And that causes this downward spiral that can force your nest egg into depletion.
Whereas, if we simply pay these taxes up front in a time where we know taxes are less,
look what happens to her situation. She could pay very little taxes in a timeframe when taxes
are the lowest in the history of her life. Or we could start to take money out of that tax-infested
account -- pay taxes at the rate we know they are today. So, once she gets to be out here:
Look at what her tax bill is, moving forward -- for the rest of her life.
This is the amount of taxes she's estimated to pay moving forward. This is doing the tax planning.
About $400,000 in taxes over the course of her life.
Now, if we just leave it to chance and do nothing, she's paying no taxes during the lowest time in
her life to take money out and pay taxes, and simply deferring the tax payment into the future.
Well, now the taxes are getting to be $20,000; $25,000; $30,000; $35,000; $40,000 per year.
This is a large percentage of her overall distribution, which forces the
account into depletion right around the time, estimated, (that) she's about 87 years old.
With life expectancies increasing, she's in great health,
the average female right now is going to live to approximately 88 years old. That's average.
If we're in good health, if we exercise, the advent of more medicine, drugs, science,
technology into the future, (it s) quite (that) possible life expectancies could very easily,
on average, increase to 90, 92 94, 95. We have to look at taxes.
Real quick: Another one we're going to look at. This is a married couple with
about three and a half million dollars saved for retirement. The green line is doing absolutely no
tax planning. The blue line, assets are preserved. They have a very large income distribution
need -- this particular case, it's around 5% right now. The assets again begin to deplete.
So, if we look here: What happens in this case, [is that] the more money we have,
the larger our required minimum distributions are. This is extremely impactful for those of
you who have much larger IRA balances. So RMDs, doing nothing. They get to be
$100,000, $120,000, $150,000 per year. That's subject to income tax in your 70s, 80s, possibly
90s, when you may not need that much money. (This is) on top of social security, on top of any
dividends or interest or capital gains you also have. It's very easy to see how we can get into
these massively high income tax brackets later in life because of required minimum distributions.
So again, looking here: We're paying the taxes up front, versus not paying the taxes up front.
And you see the big difference down the road: $50,000 versus $12,000. $59,000 versus $13,000.
We want to pay these taxes in a time period when they're lower than what they possibly will be in
the future. Of course, we want to consult with the CPA here to do some additional analysis.
But as a financial planner, somebody who's talked about this for over 10 years on the radio:
While your advisor is telling you to do this, I've been telling you we need to look at it this way,
because I believe taxes are going up and you want to keep more money in your pocket,
less than the government's. And this brings you more security over time.
Okay, so to summarize. #1, we need to be considering tax planning as a part
of an overall retirement strategy. Taxes are equally as important as having your
investments managed. And having that done under one roof allows both sides to be talking to one
another. So, find somebody who does both. #2, Roth conversions. Strongly consider what
amount is appropriate for you. But don't just look at this year, you need to look over the course of
time [for] what puts you in the best position to have a more secure retirement for your family.
#3, get that conversion done this year if you possibly can. We have, under current law, 2020,
21, 22, 23, 24 and 2025 to do these tax conversions during the Trump tax cuts.
Now I'm recording this video at the end of 2020, before the Georgia senate runoff,
we don't know what's going to happen there yet. If the democrats do win both of those seats,
we could see taxes going up as soon as next year. So do not procrastinate.
Talk to your CPA, talk to your advisor. If your advisor won't help you with this,
find one who will and do something today. It's better to do something than to do nothing.
(#4) thing, understand that if we do nothing, (then) for a lot of you what will happen
is required minimum distributions. They start at 72 years old. You must take 3.65% out at first,
but that percentage increases every single year. So: 4%, 5%, 6%, 7%, 8%, 9%, 10%, 12%,
14%, 15%, 16%, 17% each year, over time it goes up. You're forced to take more and more
out of that retirement account. It can create massive required minimum distributions, which
will increase possibly your Medicare premiums to -- right now -- over $500 per month per spouse
is the top bracket. But that's going up most likely. Your income taxes, your investment taxes.
It's a domino effect. So, understand the impact of not doing anything means higher requirement
on distributions which creates this domino effect that leads you to pay more taxes.
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