March 6, 2025 • 18 mins
This episode focuses on effectively managing significant one-off financial expenses in retirement and the best strategies for portfolio withdrawals. We explore different sources of withdrawals, tax considerations, and how to balance immediate needs with long-term financial security.
• The impact of one-time expenses on portfolio sustainability
• Analyzing options: taxable accounts, tax-deferred accounts, and Roth IRAs
• The importance of understanding tax implications in retirement planning
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Ari Taublieb, CFP ®, MBA is the Chief Growth Officer of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.
“Early Retirement – Financial Freedom” is a podcast produced by Root Financial Partners, an SEC-registered investment adviser. The content provided is for informational and educational purposes only. It should not be interpreted as investment, legal, or tax advice. I may reference planning situations based on real client experiences, but they’ve been simplified for clarity. Always consult your own financial advisor before making decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:28):
no-transcript over.
Today is a comment that wasleft in the Root Collective,
which is our community.
So if you have not seen theprevious episodes where we go
into detail on that rootcollective, certainly check that
out.
It is free and in thedescription of this episode,
whether you're watching onYouTube or listening on our
(00:49):
various podcasts, I'm going toread this comment and then we're
going to get to address it.
So you ready, james, I'm ready,cool.
This comes from Gary R and heposts and says his subject line
is one time expense soon to beretired.
Howdy y'all.
I'm in my final recreationalemployment months.
So he's speaking our languageeither four or 10 to retirement
(01:14):
and thinking of having some workdone on the house approximately
40 K.
This brings up the question ofwhere to pull portfolio funds
from.
I'm firmly in the 24% taxbracket.
Now he's just flexing on usguys.
Okay, with the possibility ofdropping to 22% post retirement,
lower in retirement, confidentmy portfolio can handle the hit
(01:34):
without an impact on myretirement goals.
That being said, I'd still liketo pull the funds, as Ari would
say, optimally.
Here are the options as I seethem Taxable account, which we
call the superhero Of allpotential sources.
The 40K would represent thelargest percentage of our
brokerage accounts, other thanany cash we have, but we would
(01:55):
get the benefit of the long-termcapital gains rate.
So that's number one, optionone.
Option two tax deferred account.
So although I'm not 59 and ahalf, I'm still able to pull
money for my 401k withoutincurring a 10% penalty.
Whoa, whoa, whoa.
How do you do that?
We'll mention that in a littlebit.
I could pull from here and pay24% without this fear of jumping
(02:16):
to that next bracket, 32.
And then the third option istax-free.
He says I don't have access toall of the money in my Roth, but
I believe I could pull fromwhat represents my personal
contributions, which, by the way, he is correct on that is
allowed.
Which brings us to option four.
I could just use cash, but itwould more severely deplete my
(02:36):
cash reserves.
Thoughts all.
So the beautiful thing here,james, is he's asking the whole
group here, not just us.
Speaker 2 (02:50):
He probably doesn't even know that he was asking us,
but he asked, so we're going togive you the answer, Gary.
Thoughts on this.
James, there's at least athree-part framework that I
would want to go through toanswer that.
It sounds like he's actuallyalready gone through part of
this.
The first part is just can youdo this?
And I think he's approachingthis the right way.
The you know generally we lookat okay, can I retire?
Okay, what does that come downto?
It comes down to can yourportfolio meet the needs that
you need it to meet that gobeyond what social security or
(03:11):
any potential othernon-portfolio income sources,
like a pension, are going togenerate?
So, basic example you have$500,000 in a portfolio.
You need $20,000 per year fromyour portfolio.
Cool, that's a 4% withdrawalrate that should be sustainable
if your portfolio is investedthe right way for call it, 30
plus years, Call it good.
(03:32):
Well, what about that personthat needs $20,000 per year also
has a major home renovationthat's going to cost them
$200,000.
Well, you take that $200,000out of the 500.
Now you're down to $300,000.
Can that 300,000 still supportthe $20,000 per year that you
need?
Now, all of a sudden, that'sover a 6.5% per year withdrawal
(03:53):
purchases.
Is that a new vehicle?
Is that a home remodel?
Is that sending kids to college?
Is that paying for a wedding?
Is that all these differentthings?
So think about that first.
What portion of your portfoliois needed for these one-off
(04:15):
expenses?
And then, is the remainderenough such that a sustainable
withdrawal rate taken from thatportfolio could continue to meet
your call it your core basicincome needs along the way?
So it sounds like that'salready been taken care of.
Gary's already gone through that.
He says something I'm trying tolook for the exact quote here.
He says I'm confident myportfolio can handle the hit
without any impact on myretirement goals.
(04:36):
So I'm going to make theassumption that Gary has looked
at that.
The second thing is how are youinvested?
By the way, the third thing istaxes.
To skip ahead.
I think Gary's looking at thetax piece, and that's the
question.
There needs to be a progressionhere to get to that piece.
The first piece is can yourretirement still support that?
Number two is investments, andthis is actually an important
(05:03):
one of how should yourinvestments be allocated in
order to support that?
So, for example, if 100% ofGary's assets are invested I'm
using extreme example here.
He's 100% invested intoMcDonald's stock, every single
account, all McDonald's stock.
He needs $40,000.
And after one year ofretirement, McDonald's stock has
tanked 50% because no one wantstheir hamburgers anymore.
Well, what's he going to berequired to do?
(05:24):
He's going to be required tosell McDonald's stock when it's
down 50% to free up that $40,000.
In other words, he's going tohave to sell a good chunk of
stock at a severe discount.
So what do you do?
Number one, you don't just ownone stock, obviously.
But number two, you say what'sthe right mix of investments
between, at a high level growthinvestments and stable
(05:49):
investments?
We call it root reservesinternally.
So what's the growth allocation?
Things are going to grow foryou to keep up with inflation.
What's the right things ofinternally, as we'd speak about
it, root reserves.
Root reserves is going toinclude any outflows you need
from your portfolio over thenext, uh, call it, five years.
So this would be something thatGary would say in addition to
my monthly need from myportfolio, how much do I need to
(06:11):
pull for this $40,000 toremodel?
So now I'll finally get to hisactual question.
Once you've determined how muchneeds to be stable so that you
have five years worth of that,so that, even in a downturn in
the market, you can still meetyour needs.
Now it's a tax piece.
Now this is where you shouldhave a tax strategy that,
(06:31):
essentially, is helping tounderstand what tax bracket we
want to be in.
Now.
Of course, we all want to be inthe 0%.
If we could just wave a wandand say I'm in the 0% tax
bracket, cool, we'd do that.
But what do we want to be intoday?
So that I'm minimizing or notjumping into any extreme tax
brackets in the future.
So what Gary should do is todayhe's in the 24% bracket.
(06:52):
It sounds like, if I'm readingbetween the lines, he'll be in
the probably the 22% bracketwhen he retires.
That's not the full picture,though.
What are you going to be in,Gary, say, 10 years from now, 20
years from now?
Who knows some things.
But specifically, what aboutwhen social security starts?
What's that going to do to yourtax bracket?
What about when requiredminimum distributions kick in?
(07:14):
What's that going to do to yourtax bracket?
What about when certain I don'tknow if there's windfalls of
selling a home, moving states,other pensions coming into play?
Understanding the fulllandscape of what will your tax
bracket look like over thecourse of retirement.
So you're not just looking.
Okay, I'm in the 24% brackettoday.
(07:35):
Well, so what?
What are we comparing that to?
What we should compare that tois where you're going to be,
which, yes, is somewhat of aneducated guess, because tax
brackets and tax law can andwill change.
But when he starts to do that,he can start to say, oh, maybe,
for example, I shouldn't exceedthe 12% bracket.
Well, the good news aboutretirement planning is you get
(07:56):
to fully dictate this.
I shouldn't say fully to anextent, because you can pull the
right amounts from cash versustaxable accounts, versus
traditional IRAs versus RothIRAs.
You can manufacture the taxableincome that's right for you.
So if he's looking at this andif he looks at his whole tax
landscape and says I shouldnever really be above the 12%
bracket, well then, come up withthe right mix of withdrawals.
(08:17):
Is that more from cash andbrokerage and then a little bit
from the IRA, just to fill upthe 12% bracket, versus?
If he says I should really befilling up the 32% bracket today
to avoid being in a 35% bracketin the future, it probably
means he has an enormoustraditional IRA.
So that's kind of an extremeexample, but it's essentially
looking at where am I going tobe, when am I today, as is, and
(08:40):
then where should I pull fundsfrom to try to fill up the right
bracket.
But here's one last thing.
There's a theme here.
Are you asking me a question?
I take way too long to answerit, so sorry about that.
But here's what I see somepeople doing.
They have cash on hand and wealmost get addicted to that cash
on hand because it's there andit's tangible and we're going to
(09:01):
you know, we're going toimplement our Roth conversion
strategy because we're going tobe living on this cash.
Well, if Gary pulls more moneyfrom his IRA today and that
pushes him into the 32% taxbracket because he wanted to
preserve that cash, and now nextyear he's living on the cash
and converting only up to the 22or 24% bracket, he kind of shot
(09:22):
himself in the foot doing that.
He said wait, use your cash toprevent going into the 32%
bracket, not to allow you toconvert in the 22 to 24% bracket
.
So we almost have to detachourselves from being too
connected to any of our specificaccounts.
That cash account tends to besomething that people get pretty
connected to.
To say objectively where shouldI pull funds from today to
(09:45):
minimize the lifetime taxliability I'm expected to pay?
Speaker 1 (09:48):
Great answer.
The fourth one I would add issleep, which you're not going to
see.
If you look it up on any forumof analysis, it's not going to
see the sleep analysis, butsleep.
And so what I mean by that isis there an amount of cash that
you want to have at all times,no matter what?
I have clients that will say nomatter what, I need 50,000.
I couldn't tell you why.
It's not scientific, I justsleep better.
(10:11):
Okay, great, then your analysisshould not be cookie cutter.
Even though the conversionanalysis or the withdrawal
strategy says you should pullfrom this account over that
account, it should be based onyeah, take the finances into
consideration and then go, waita second.
I'm a human, I'm not a robot,and the mistake that we'll see
is let's just use Gary's examplefor a second.
(10:31):
Let's assume Gary goesoptimally.
If I don't want to pull fromcash, what are my options?
Okay, so I could use this ruleof 55 thing, I could try this
Roth tax-free thing.
I could do this superhero thing.
Well, on paper, the capitalgains rate seems great, but we
have no idea if Gary's got allMcDonald's because he hates
Burger King, like.
We just don't know.
So what we need to get clear onis like hey, what's going to
(10:54):
let you sleep at night and whatdoes the tax answer say?
With assumptions that arewell-known and I apologize
because I've told this story afew times, but I'll do it one
more time because I think thisis helpful which is I went to a
doctor this was months ago and Isaid, doc, what you just said
there, it sounded great.
I think you think it soundedgreat.
Don't know what you just said,so try again.
So he goes, okay.
So he starts explaining to methe lab that the pills are made
(11:17):
in that he wants to give me formy issue, and I said, doc,
respectfully, I don't care aboutthe lab, I need to know why I
need to take this pill or why Idon't need to take this pill,
and I'm not going to take itblindly.
So I want you to educate me asto why I'm going to take this
pill.
But you're going too deep in thelab and sometimes this analysis
paralysis occurs.
Gary, I'm not calling you outto be mean, I don't know if
(11:38):
you're doing this, but if we arespending all of our time on the
analysis when, in reality,there's a simple answer that's
going to allow you to takeaction.
Maybe it's not even optimal,which you know how much I hate
saying that, since you calledout my optimal word in here.
Sometimes that can be the bestanswer too.
So we want to give you guys hey, here's like the pill, but
here's what I need to know aboutfirst, what's your health goals
(12:00):
?
Legacy, yada, yada.
Speaker 2 (12:02):
Yeah, one more thing I'm going to add into this too
is kind of just like a tip forpeople who are planning for
one-off expenses.
Let's assume, just forsimplicity, that someone has
they're retired and all theirmoney's in an IRA and they're
pulling money out of their IRAand they're partway between the
12% and the 22% tax bracket andthey're not doing the Roth
(12:22):
conversions because they say,you know what we?
We don't need to becauserequired distributions aren't
going to be a huge issue for usin the future.
We're just going to, we'regoing to live here in the middle
between the technically a 12%bracket, but partway between 12
and 22%, and that individual isplanning to have a big home
remodel in five years and thathome remodel is going to cost
$150,000.
Well what?
(12:43):
And then in year five theymight spike up into the 24%
bracket and then back down tothe 12th.
Well, how do you plan ahead forthat?
That's actually pretty simple.
It's the same concept of asinking fund.
You know, if I want to be ableto take one big trip with my
family once a year and it'sgoing to cost $12,000, to use a
(13:06):
easy math number, well, I'm notgoing to try to pay $12,000 from
one month of salary that monthI actually take the trip.
I'm going to set aside $1,000 amonth each month, so that by
the end of that 12th month it'sall there and I'm good to go to
take my trip.
Well, same thing here.
Almost think of like a sinkingfund.
Don't just wait for year fiveto take out a giant amount from
(13:26):
your IRA that pushes you up acouple of tax brackets.
Take out enough in the yearsleading up to that to say, okay,
I can still take a little bitmore at a 12% rate and maybe I
put that into a brokerageaccount or maybe a cash account,
depending on how far out I amfrom the incurring the expense.
And in doing that, you'repreparing for this one-off
expense using your lower taxbrackets, as opposed to getting
(13:48):
trapped in a much higher one.
Speaker 1 (13:52):
Really good tip, especially with like an RV,
because it's something that youget excited about.
Every month you're puttingmoney away and you know, hey,
I'm going to get that RV.
And then you find an RV thatyou really like.
So now you put even more away.
Well, you probably weren'tgoing to feel comfortable taking
out $140,000 to buy an RV,because you've probably never
bought anything worth thatamount of money, maybe aside
from your home.
But now you're able to do itbecause you're like I was
(14:13):
intentional about saving forthat.
Yes exactly.
Speaker 2 (14:17):
So this, you know this is all going back to the
very beginning.
Those one-off expenses.
Yes, we talked about aframework for thinking through
it.
Can you still meet your otherretirement income goals?
Do you have the rightinvestment strategy to meet that
?
Do you have the right optimalwithdrawal strategy to minimize
your taxes?
But still, there's oftentimes amental hangup.
(14:38):
But that just hurts to pull out$40,000, $50,000, $100,000 when
that's your portfolio, that'syour livelihood, that's what
you've worked for.
So keep that in mind too.
It's not going to be easy.
Even if you have the rightretirement and investment and
tax strategy, there still mightbe a mental hangup.
So prepare for that, preparethat it might not just be easy
to do, to write a five-figure,six-figure check, whatever it
(15:00):
might be.
But when we start thinkingabout what's the true purpose of
our money it's not to keepgrowing bigger and bigger,
making us richer and richeruntil we die one day it's to say
what are the experiences I canhave in my retirement to make
the most of it?
So just another perspectivepiece on those expenses in
retirement.
Speaker 1 (15:25):
Love it.
Last one I have is we havebiases as well as advisors.
As humans, my gut I go toone-time expense right.
When, gary, I saw you post thatand I decided to fuse that for
our episode today, my gut willgo to oh, do cash, because no
tax implications.
You've already kind of savedfor it, whether you know it or
not, but I don't know.
Do you have an emergency fund?
And when we think of anemergency fund, I'll think
what's the purpose of this andthis is an emergency fund is I
(15:46):
want to go tap into something ifI need it, if my car breaks.
But when you're in retirement,you don't really need an
emergency fund because, yes, youwant cash on hand, but the
traditional sense is I don'twant to have to go pull for my
401k, where there's a penalty.
And what if markets are downand you name it?
Well, you already explainedhere, gary.
You have the ability to accessthose funds.
(16:07):
So it puts you actually in amore difficult position, as odd
as it may sound, because it'slike hey, when you have more
money, you have more decisionsthat feel like they weigh more,
because you're like why is thatthe case, though?
I saved and invested.
It's the same reason.
People reach out to us goinghey, why am I more stressed with
10 million versus when I had500,000?
Well, there's more to lose andthese decisions become really
(16:28):
difficult.
Speaker 2 (16:28):
So just recognize you have biases, we have biases, we
all got them, we all got themand uh, kind of good excuse to
give it to them.
So very cool.
Well, anything else today, Iguess, shout out collective.
If you're not in there,collective is free.
Collective is a community of,as as of now it's launched a
week ago, two weeks ago, 1500plus people in that community
(16:50):
interacting, sharing tips.
Um, really cool thingshappening.
So join.
The collective link is in theshow notes.
Anything else already we missed?
Speaker 1 (16:59):
Yeah, when you check out at McDonald's, if you tell
them you're in the collective,you won't get any discount and
they might look at you funny.
But if you want to record itand share it with us, we'll post
it.
Speaker 2 (17:08):
We'll make a channel for that.
All right, everyone.
Thank you for listening and wewill see you all next time.
See ya.
The information presented isfor educational purposes only
and is not intended as an offeror solicitation for the sale or
purchase of any specificsecurities, investments or
investment strategies.
Investments involve risk andare not guaranteed.
Any mention of rates of returnare historical and illustrative
(17:30):
in nature and are not aguarantee of future returns.
Past performance does notguarantee future performance.
Speaker 1 (17:35):
Viewers are encouraged to seek advice from a
qualified tax, legal orinvestment advisor professional
to determine whether anyinformation presented may be
suitable for their specificsituation Once again.
Speaker 2 (17:47):
I'm James Canole, founder of Root Financial, and
if you're interested in seeinghow we help our clients at Root
Financial get the most out oflife with their money, be sure
to visit us atwwwrootfinancialpartnerscom.
no-transcript over.
Today is a comment that wasleft in the Root Collective,
which is our community.
So if you have not seen theprevious episodes where we go
into detail on that rootcollective, certainly check that
out.
It is free and in thedescription of this episode,
whether you're watching onYouTube or listening on our
(00:49):
various podcasts, I'm going toread this comment and then we're
going to get to address it.
So you ready, james, I'm ready,cool.
This comes from Gary R and heposts and says his subject line
is one time expense soon to beretired.
Howdy y'all.
I'm in my final recreationalemployment months.
So he's speaking our languageeither four or 10 to retirement
(01:14):
and thinking of having some workdone on the house approximately
40 K.
This brings up the question ofwhere to pull portfolio funds
from.
I'm firmly in the 24% taxbracket.
Now he's just flexing on usguys.
Okay, with the possibility ofdropping to 22% post retirement,
lower in retirement, confidentmy portfolio can handle the hit
(01:34):
without an impact on myretirement goals.
That being said, I'd still liketo pull the funds, as Ari would
say, optimally.
Here are the options as I seethem Taxable account, which we
call the superhero Of allpotential sources.
The 40K would represent thelargest percentage of our
brokerage accounts, other thanany cash we have, but we would
(01:55):
get the benefit of the long-termcapital gains rate.
So that's number one, optionone.
Option two tax deferred account.
So although I'm not 59 and ahalf, I'm still able to pull
money for my 401k withoutincurring a 10% penalty.
Whoa, whoa, whoa.
How do you do that?
We'll mention that in a littlebit.
I could pull from here and pay24% without this fear of jumping
(02:16):
to that next bracket, 32.
And then the third option istax-free.
He says I don't have access toall of the money in my Roth, but
I believe I could pull fromwhat represents my personal
contributions, which, by the way, he is correct on that is
allowed.
Which brings us to option four.
I could just use cash, but itwould more severely deplete my
(02:36):
cash reserves.
Thoughts all.
So the beautiful thing here,james, is he's asking the whole
group here, not just us.
Speaker 2 (02:50):
He probably doesn't even know that he was asking us,
but he asked, so we're going togive you the answer, Gary.
Thoughts on this.
James, there's at least athree-part framework that I
would want to go through toanswer that.
It sounds like he's actuallyalready gone through part of
this.
The first part is just can youdo this?
And I think he's approachingthis the right way.
The you know generally we lookat okay, can I retire?
Okay, what does that come downto?
It comes down to can yourportfolio meet the needs that
you need it to meet that gobeyond what social security or
(03:11):
any potential othernon-portfolio income sources,
like a pension, are going togenerate?
So, basic example you have$500,000 in a portfolio.
You need $20,000 per year fromyour portfolio.
Cool, that's a 4% withdrawalrate that should be sustainable
if your portfolio is investedthe right way for call it, 30
plus years, Call it good.
(03:32):
Well, what about that personthat needs $20,000 per year also
has a major home renovationthat's going to cost them
$200,000.
Well, you take that $200,000out of the 500.
Now you're down to $300,000.
Can that 300,000 still supportthe $20,000 per year that you
need?
Now, all of a sudden, that'sover a 6.5% per year withdrawal
(03:53):
purchases.
Is that a new vehicle?
Is that a home remodel?
Is that sending kids to college?
Is that paying for a wedding?
Is that all these differentthings?
So think about that first.
What portion of your portfoliois needed for these one-off
(04:15):
expenses?
And then, is the remainderenough such that a sustainable
withdrawal rate taken from thatportfolio could continue to meet
your call it your core basicincome needs along the way?
So it sounds like that'salready been taken care of.
Gary's already gone through that.
He says something I'm trying tolook for the exact quote here.
He says I'm confident myportfolio can handle the hit
without any impact on myretirement goals.
(04:36):
So I'm going to make theassumption that Gary has looked
at that.
The second thing is how are youinvested?
By the way, the third thing istaxes.
To skip ahead.
I think Gary's looking at thetax piece, and that's the
question.
There needs to be a progressionhere to get to that piece.
The first piece is can yourretirement still support that?
Number two is investments, andthis is actually an important
(05:03):
one of how should yourinvestments be allocated in
order to support that?
So, for example, if 100% ofGary's assets are invested I'm
using extreme example here.
He's 100% invested intoMcDonald's stock, every single
account, all McDonald's stock.
He needs $40,000.
And after one year ofretirement, McDonald's stock has
tanked 50% because no one wantstheir hamburgers anymore.
Well, what's he going to berequired to do?
(05:24):
He's going to be required tosell McDonald's stock when it's
down 50% to free up that $40,000.
In other words, he's going tohave to sell a good chunk of
stock at a severe discount.
So what do you do?
Number one, you don't just ownone stock, obviously.
But number two, you say what'sthe right mix of investments
between, at a high level growthinvestments and stable
(05:49):
investments?
We call it root reservesinternally.
So what's the growth allocation?
Things are going to grow foryou to keep up with inflation.
What's the right things ofinternally, as we'd speak about
it, root reserves.
Root reserves is going toinclude any outflows you need
from your portfolio over thenext, uh, call it, five years.
So this would be something thatGary would say in addition to
my monthly need from myportfolio, how much do I need to
(06:11):
pull for this $40,000 toremodel?
So now I'll finally get to hisactual question.
Once you've determined how muchneeds to be stable so that you
have five years worth of that,so that, even in a downturn in
the market, you can still meetyour needs.
Now it's a tax piece.
Now this is where you shouldhave a tax strategy that,
(06:31):
essentially, is helping tounderstand what tax bracket we
want to be in.
Now.
Of course, we all want to be inthe 0%.
If we could just wave a wandand say I'm in the 0% tax
bracket, cool, we'd do that.
But what do we want to be intoday?
So that I'm minimizing or notjumping into any extreme tax
brackets in the future.
So what Gary should do is todayhe's in the 24% bracket.
(06:52):
It sounds like, if I'm readingbetween the lines, he'll be in
the probably the 22% bracketwhen he retires.
That's not the full picture,though.
What are you going to be in,Gary, say, 10 years from now, 20
years from now?
Who knows some things.
But specifically, what aboutwhen social security starts?
What's that going to do to yourtax bracket?
What about when requiredminimum distributions kick in?
(07:14):
What's that going to do to yourtax bracket?
What about when certain I don'tknow if there's windfalls of
selling a home, moving states,other pensions coming into play?
Understanding the fulllandscape of what will your tax
bracket look like over thecourse of retirement.
So you're not just looking.
Okay, I'm in the 24% brackettoday.
(07:35):
Well, so what?
What are we comparing that to?
What we should compare that tois where you're going to be,
which, yes, is somewhat of aneducated guess, because tax
brackets and tax law can andwill change.
But when he starts to do that,he can start to say, oh, maybe,
for example, I shouldn't exceedthe 12% bracket.
Well, the good news aboutretirement planning is you get
(07:56):
to fully dictate this.
I shouldn't say fully to anextent, because you can pull the
right amounts from cash versustaxable accounts, versus
traditional IRAs versus RothIRAs.
You can manufacture the taxableincome that's right for you.
So if he's looking at this andif he looks at his whole tax
landscape and says I shouldnever really be above the 12%
bracket, well then, come up withthe right mix of withdrawals.
(08:17):
Is that more from cash andbrokerage and then a little bit
from the IRA, just to fill upthe 12% bracket, versus?
If he says I should really befilling up the 32% bracket today
to avoid being in a 35% bracketin the future, it probably
means he has an enormoustraditional IRA.
So that's kind of an extremeexample, but it's essentially
looking at where am I going tobe, when am I today, as is, and
(08:40):
then where should I pull fundsfrom to try to fill up the right
bracket.
But here's one last thing.
There's a theme here.
Are you asking me a question?
I take way too long to answerit, so sorry about that.
But here's what I see somepeople doing.
They have cash on hand and wealmost get addicted to that cash
on hand because it's there andit's tangible and we're going to
(09:01):
you know, we're going toimplement our Roth conversion
strategy because we're going tobe living on this cash.
Well, if Gary pulls more moneyfrom his IRA today and that
pushes him into the 32% taxbracket because he wanted to
preserve that cash, and now nextyear he's living on the cash
and converting only up to the 22or 24% bracket, he kind of shot
(09:22):
himself in the foot doing that.
He said wait, use your cash toprevent going into the 32%
bracket, not to allow you toconvert in the 22 to 24% bracket
.
So we almost have to detachourselves from being too
connected to any of our specificaccounts.
That cash account tends to besomething that people get pretty
connected to.
To say objectively where shouldI pull funds from today to
(09:45):
minimize the lifetime taxliability I'm expected to pay?
Speaker 1 (09:48):
Great answer.
The fourth one I would add issleep, which you're not going to
see.
If you look it up on any forumof analysis, it's not going to
see the sleep analysis, butsleep.
And so what I mean by that isis there an amount of cash that
you want to have at all times,no matter what?
I have clients that will say nomatter what, I need 50,000.
I couldn't tell you why.
It's not scientific, I justsleep better.
(10:11):
Okay, great, then your analysisshould not be cookie cutter.
Even though the conversionanalysis or the withdrawal
strategy says you should pullfrom this account over that
account, it should be based onyeah, take the finances into
consideration and then go, waita second.
I'm a human, I'm not a robot,and the mistake that we'll see
is let's just use Gary's examplefor a second.
(10:31):
Let's assume Gary goesoptimally.
If I don't want to pull fromcash, what are my options?
Okay, so I could use this ruleof 55 thing, I could try this
Roth tax-free thing.
I could do this superhero thing.
Well, on paper, the capitalgains rate seems great, but we
have no idea if Gary's got allMcDonald's because he hates
Burger King, like.
We just don't know.
So what we need to get clear onis like hey, what's going to
(10:54):
let you sleep at night and whatdoes the tax answer say?
With assumptions that arewell-known and I apologize
because I've told this story afew times, but I'll do it one
more time because I think thisis helpful which is I went to a
doctor this was months ago and Isaid, doc, what you just said
there, it sounded great.
I think you think it soundedgreat.
Don't know what you just said,so try again.
So he goes, okay.
So he starts explaining to methe lab that the pills are made
(11:17):
in that he wants to give me formy issue, and I said, doc,
respectfully, I don't care aboutthe lab, I need to know why I
need to take this pill or why Idon't need to take this pill,
and I'm not going to take itblindly.
So I want you to educate me asto why I'm going to take this
pill.
But you're going too deep in thelab and sometimes this analysis
paralysis occurs.
Gary, I'm not calling you outto be mean, I don't know if
(11:38):
you're doing this, but if we arespending all of our time on the
analysis when, in reality,there's a simple answer that's
going to allow you to takeaction.
Maybe it's not even optimal,which you know how much I hate
saying that, since you calledout my optimal word in here.
Sometimes that can be the bestanswer too.
So we want to give you guys hey, here's like the pill, but
here's what I need to know aboutfirst, what's your health goals
(12:00):
?
Legacy, yada, yada.
Speaker 2 (12:02):
Yeah, one more thing I'm going to add into this too
is kind of just like a tip forpeople who are planning for
one-off expenses.
Let's assume, just forsimplicity, that someone has
they're retired and all theirmoney's in an IRA and they're
pulling money out of their IRAand they're partway between the
12% and the 22% tax bracket andthey're not doing the Roth
(12:22):
conversions because they say,you know what we?
We don't need to becauserequired distributions aren't
going to be a huge issue for usin the future.
We're just going to, we'regoing to live here in the middle
between the technically a 12%bracket, but partway between 12
and 22%, and that individual isplanning to have a big home
remodel in five years and thathome remodel is going to cost
$150,000.
Well what?
(12:43):
And then in year five theymight spike up into the 24%
bracket and then back down tothe 12th.
Well, how do you plan ahead forthat?
That's actually pretty simple.
It's the same concept of asinking fund.
You know, if I want to be ableto take one big trip with my
family once a year and it'sgoing to cost $12,000, to use a
(13:06):
easy math number, well, I'm notgoing to try to pay $12,000 from
one month of salary that monthI actually take the trip.
I'm going to set aside $1,000 amonth each month, so that by
the end of that 12th month it'sall there and I'm good to go to
take my trip.
Well, same thing here.
Almost think of like a sinkingfund.
Don't just wait for year fiveto take out a giant amount from
(13:26):
your IRA that pushes you up acouple of tax brackets.
Take out enough in the yearsleading up to that to say, okay,
I can still take a little bitmore at a 12% rate and maybe I
put that into a brokerageaccount or maybe a cash account,
depending on how far out I amfrom the incurring the expense.
And in doing that, you'repreparing for this one-off
expense using your lower taxbrackets, as opposed to getting
(13:48):
trapped in a much higher one.
Speaker 1 (13:52):
Really good tip, especially with like an RV,
because it's something that youget excited about.
Every month you're puttingmoney away and you know, hey,
I'm going to get that RV.
And then you find an RV thatyou really like.
So now you put even more away.
Well, you probably weren'tgoing to feel comfortable taking
out $140,000 to buy an RV,because you've probably never
bought anything worth thatamount of money, maybe aside
from your home.
But now you're able to do itbecause you're like I was
(14:13):
intentional about saving forthat.
Yes exactly.
Speaker 2 (14:17):
So this, you know this is all going back to the
very beginning.
Those one-off expenses.
Yes, we talked about aframework for thinking through
it.
Can you still meet your otherretirement income goals?
Do you have the rightinvestment strategy to meet that
?
Do you have the right optimalwithdrawal strategy to minimize
your taxes?
But still, there's oftentimes amental hangup.
(14:38):
But that just hurts to pull out$40,000, $50,000, $100,000 when
that's your portfolio, that'syour livelihood, that's what
you've worked for.
So keep that in mind too.
It's not going to be easy.
Even if you have the rightretirement and investment and
tax strategy, there still mightbe a mental hangup.
So prepare for that, preparethat it might not just be easy
to do, to write a five-figure,six-figure check, whatever it
(15:00):
might be.
But when we start thinkingabout what's the true purpose of
our money it's not to keepgrowing bigger and bigger,
making us richer and richeruntil we die one day it's to say
what are the experiences I canhave in my retirement to make
the most of it?
So just another perspectivepiece on those expenses in
retirement.
Speaker 1 (15:25):
Love it.
Last one I have is we havebiases as well as advisors.
As humans, my gut I go toone-time expense right.
When, gary, I saw you post thatand I decided to fuse that for
our episode today, my gut willgo to oh, do cash, because no
tax implications.
You've already kind of savedfor it, whether you know it or
not, but I don't know.
Do you have an emergency fund?
And when we think of anemergency fund, I'll think
what's the purpose of this andthis is an emergency fund is I
(15:46):
want to go tap into something ifI need it, if my car breaks.
But when you're in retirement,you don't really need an
emergency fund because, yes, youwant cash on hand, but the
traditional sense is I don'twant to have to go pull for my
401k, where there's a penalty.
And what if markets are downand you name it?
Well, you already explainedhere, gary.
You have the ability to accessthose funds.
(16:07):
So it puts you actually in amore difficult position, as odd
as it may sound, because it'slike hey, when you have more
money, you have more decisionsthat feel like they weigh more,
because you're like why is thatthe case, though?
I saved and invested.
It's the same reason.
People reach out to us goinghey, why am I more stressed with
10 million versus when I had500,000?
Well, there's more to lose andthese decisions become really
(16:28):
difficult.
Speaker 2 (16:28):
So just recognize you have biases, we have biases, we
all got them, we all got themand uh, kind of good excuse to
give it to them.
So very cool.
Well, anything else today, Iguess, shout out collective.
If you're not in there,collective is free.
Collective is a community of,as as of now it's launched a
week ago, two weeks ago, 1500plus people in that community
(16:50):
interacting, sharing tips.
Um, really cool thingshappening.
So join.
The collective link is in theshow notes.
Anything else already we missed?
Speaker 1 (16:59):
Yeah, when you check out at McDonald's, if you tell
them you're in the collective,you won't get any discount and
they might look at you funny.
But if you want to record itand share it with us, we'll post
it.
Speaker 2 (17:08):
We'll make a channel for that.
All right, everyone.
Thank you for listening and wewill see you all next time.
See ya.
The information presented isfor educational purposes only
and is not intended as an offeror solicitation for the sale or
purchase of any specificsecurities, investments or
investment strategies.
Investments involve risk andare not guaranteed.
Any mention of rates of returnare historical and illustrative
(17:30):
in nature and are not aguarantee of future returns.
Past performance does notguarantee future performance.
Speaker 1 (17:35):
Viewers are encouraged to seek advice from a
qualified tax, legal orinvestment advisor professional
to determine whether anyinformation presented may be
suitable for their specificsituation Once again.
Speaker 2 (17:47):
I'm James Canole, founder of Root Financial, and
if you're interested in seeinghow we help our clients at Root
Financial get the most out oflife with their money, be sure
to visit us atwwwrootfinancialpartnerscom.
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