S3 Ep1: GRD029: What’s the Single Biggest Mistake Retirees Make?

In this episode of The Great Retirement Debate, Ed Slott and Jeff Levine discuss what they believe to be the single biggest mistake retirees make. 

Episode Transcript

(00:00):
Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just loveto talk about retirement and taxes.
Look, our mission is simple to educateyou, the saver, so that you can make
better decisions because better decisionson the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debatethe pros and the cons of a particular
retirement strategy or topic.

(00:22):
With the goal of helping you keepmore of your hard earned money.
At the end of each debate There'sgoing to be one clear winner You a more
informed saver who can hopefully applythe merits of each side of the debate
to your own personal situation To decidewhat's best for you and your family.
So here we go.
Welcome to the Great RetirementDebate All right, Ed welcome back.

(00:44):
We're back for season three of thegreat retirement debate That's right.
So what are we kicking it off with?
We've got an interesting topic today.
One for discussion.
We're going to talk about what'sthe single biggest mistake retirees
make besides retiring besides that.
So you know what?
That is a fair point.
Like maybe retiring is indeed amistake for some people, but all

(01:04):
right, let's, let's, let's get out.
Let's get right to it.
Ed, we got.
You know, Season 3, let'sget right into the meat.
What's, in your opinion, the singlebiggest mistake that retirees make?
Well, I had three, but if I had topick one, paying too much in taxes.
I'm shocked.
Shocked, I tell you.
Look at the, look at thesense of shock on my face.
All right.
So, paying too much in taxes.
What are the other two, out of curiosity?

(01:25):
Well, uh, beneficiary formsand rollover mistakes.
Okay.
All right.
What would you have picked?
Uh, overconfidence.
Overconfidence.
Overconfidence.
I'll unwrap that later.
I'm gonna leave, I'm gonna leave ourlisteners on the edge of their seat
for a little bit while we unpack taxes.
So taxes, you say, are the single biggestmistake overpaying taxes in retirement.
Give us some more.
Because we're trained.

(01:46):
With RMDs, they keep pushing the age back.
Now it's 73.
Just keep putting itoff and putting it off.
But, the account doesn't stop growing,all of a sudden you've, you're putting
it off, you're putting it off, andthe account is growing, and I'm
worried about future higher taxes ifCongress ever does anything about it.
I've been saying that for years, andthey've never done anything about it.
Well, they've helped grow it.

(02:06):
create more of a problem by lowering taxeseven more right but i don't think taxes
will ever be lower so the biggest mistakeis not using up all the brackets leaving
money on the table in the 12 22 24 lowpercent brackets because they just want
to take the bare minimum when they'reAt RMD age, say at age 73, and not doing

(02:28):
anything before that, even though they maybe retired, because they don't have to.
Yeah, I certainly agree that Congresshas, has given everybody what they call a
break, but it's not really a break, right?
If people push off those RMDs,it could create a larger problem.
You know, your comments there remindedme of two things I'm fond of saying.
One is, Your goal shouldn't be to createthe lowest tax bill in any one year,

(02:51):
but to create the lowest lifetime tax.
That's the winner of the game, right?
And actually with retirementaccounts, sometimes we have to go
beyond the lowest lifetime tax bill.
Sometimes it's the lowest multigenerational tax bill because that tax
liability on like a brokerage accountdoesn't go away when someone dies, right?
It goes to the beneficiary.
The other thing it reminded meof is, uh, when we're looking at

(03:12):
individuals, right, and they'reso happy they paid no tax, right?
Like, oh, I paid no taxes here.
Yeah, it means you didn'tuse any of the brackets.
That's right.
When I, when I meet someone not, and look,there are a lot of people in this country
who are, who are working, who, uh, becauseof the way our tax system works, they,
they don't earn enough to pay any tax.
And that's fine.
Like that's one set of individuals, butthere are a lot of other people with,

(03:33):
uh, Substantial wealth who still lookto try and pay as little as possible.
And when I meet one of thoseindividuals who looks to me and says,
Hey, I paid almost no tax last year.
You know, they're, they'rethinking like, Oh, that's a CPA.
He's gonna be so proud of me.
I look and say, I'm so sorry.
You got some bad advice.
Yeah, right.
Why would you do that?
Uh, you're right.
Like, it's all about timing, right?

(03:54):
And we should sometimes bringingforward some income paying
sooner rather than later.
Means helping to create thatlowest lifetime tax bill.
Yeah, they leave so much money on thetable overall Like you said not only
during lifetime But then you have theten years to beneficiaries who may be in
their own highest earning years and thelast thing they want is a big tax bill

(04:14):
Given they're getting an inheritance.
No one's crying the blues for them, right?
Like it's a, I always think about that.
The beneficiary, I callit like crisis planning.
Cause the beneficiaries got the money.
Like, what do you do now?
But I always have to remind myself,like if you run into the office going,
I just inherited a million dollars.
What do I, it's like, it's not theworld's biggest crisis, but you're right.
Taxes are a big play.

(04:35):
What are some other areas withbeyond, let's say just the
retirement account distributions.
What are some other areaswhere you typically find.
You know, retirees overpaying in taxes.
Well, they don't do Rothconversions ahead of time.
When they could have, and youcan still do it after RMD age,
required minimum distributions atage 73, but they cost more then

(04:56):
because you can't convert the RMD.
So, they miss out on those great yearsin their 60s where they should be sort
of dollar cost averaging or whatever youwant to call it into a Roth a little at
a time to use the brackets every year.
Yeah, and of course, any ofthose conversions done at 62
or earlier would also avoid anyof those Medicare surcharges.

(05:16):
A lot of people, once they reach 65, theygo on Medicare, and Medicare, because
our system is very complicated, andpeople like you and I need jobs, Ed.
It looks back two years at your income.
So if you are converting when you're63, that can actually impact your
Medicare premiums when you're 65,which a lot of people don't consider.
So effectively, converting before63 gets you out of that, no

(05:40):
matter how high your income is.
Right, but people don't look at that.
You know, the Medicare surchargeitem is one of the really tricky
planning items for two reasons.
The Medicare charges don't show up onyour tax return, off the tax return,
and the other item, very hard toplan with the two year look back.
So what are some other areasbehind, let's, let's move away from

(06:02):
retirement accounts for a second.
Anything else, because, you know, I knowyou're not sitting down doing returns for
a lot of people anymore, but you spentdecades, you know, preparing returns for
folks, most of them in retirement, or atleast many of them in retirement, What
were some other mistakes that you saw thattypically led individuals in retirement
to pay more tax than they should?
Not keeping track of basis.

(06:24):
What I mean, non deductiblecontributions for years.
Some people made non deductiblecontributions, and even before the law
changed many years ago, had rolloversof after tax funds from company plans.
They had What we call basis already taxmoney that they're not filing form 8606.
That's a form you file to take creditfor money you already paid tax on.

(06:45):
So if you're just paying full taxon your distribution, in essence,
for part of that, you're payingtax twice on the same money.
Absolutely.
You know, and I look at it, I think.
Another area, if we shift away fromretirement accounts for a second,
a lot of people find themselves inthat 0 percent long term capital
gains bracket when they retire.
Because it takes a lot of income nowto, to, to be out of that, right?

(07:07):
If we look at, let's say, amarried couple and they're in
retirement, they're probably over 65.
So not only are they getting thestandard deduction, they're getting
the quote unquote additional standarddeductions, which even today means
they have well over a thirty-thousanddollar standard deduction.
The 0 percent long term capitalgains bracket is up to the 12 percent

(07:28):
ordinary income tax rate, which todayis about 95, 000 for married couples.
So you put those two things together.
What you find is a married couple,even if they have $125,000 of income
in retirement, if they just take thestandard deduction, they're still
right at the top of that 0 percentlong term capital gains bracket.

(07:48):
And most retirees don't have$125,000 of income a year.
Which means they're belowthat 0 percent threshold.
For people listening, what I'm tryingto get at here is if you're in a
0 percent long term capital gainsbracket, you can sell your appreciated
stocks and your brokerage account.
Uh, and you might say, butJeff, they've gone up in value.

(08:10):
I like them that they've appreciated.
That's why I like them so much.
Fine.
Then sell them and then.
Wait, you know a day or so and buythem right back If you sell at the zero
percent long term capital gains bracket,you're paying zero percent All right.
I want to get back to the over overconfidence because you left them hanging.
Okay, but before that Just a warningon that 0 percent capital gains rate.

(08:35):
Many people see it on the taxtables but don't get it because our
tax system works in a funny way.
Ordinary income gets taxedfirst and eats into that.
That's right.
So many people look at that andsay, How come I didn't get the 0%?
Yeah, so if you're thinkingabout, Hey, does this apply to me?
What you really want to do is take all ofyour regular income, the amount of your

(08:57):
social security that's taxable, your IRAdistributions, your interest and whatnot.
And then on top of that, Uh, youwant to layer in how much in, in
long term capital gains and, uh,qualified dividends do I have?
And if total, those dollars are, fora married couple this year in 2024,
below about $125,000, you can lookspecifically at your own standard

(09:20):
deduction, et cetera, if you're over 65or under 65, but about $125,000, if the
total amount of that income is below,then those long term capital gains
and qualified dividends will be at 0%.
And worst case scenario, 15%.
Not the worst thing in the world.
Not the worst thing in the world, indeed.
Alright, overconfidence, um, hanging on.
I'm confident that I'm going to get there,but you did mention two other things.

(09:43):
So I want to make sure that we don'tleave listeners hanging on that.
You mentioned beneficiary forms.
I'll do it quickly and we'llcover it on another episode.
People don't check beneficiary forms.
All right, so do that.
Worst mistakes ever.
That'll be a separate, separate one.
All right.
Wrong people get the money.
Uh, I'll tease you for a future episode.
We just had a case where an exgirlfriend got over a million dollars
and he broke up with her in 1989.

(10:05):
All right?
I'll leave you hanging on that one.
And rollover mistakes.
People don't know how to movemoney from one IRA to another and
a lot of times it's the fault ofthe advisor or the institution
where they just get bad advice.
Oh, overconfidence.
Alright, overconfidence.
So, to me, overconfidence isprobably the single biggest risk
retirees face because there's somuch you can be overconfident about.

(10:27):
You can be overconfident about, you know,When you're going to retire, if we look at
the research, people think they are oftengoing to work longer than they will, so
they factor in, you know, too many yearsof earnings, and then they get to that
point, and they go, I guess I can't workanymore, or we're in another scenario
where they're overconfident that themarket will do really, really well, right?
They say, Oh, my goodness, the market,it's just going to continue going this

(10:49):
good forever, or they're overconfidentthat the market will not do well.
Right.
And they say it's justnever gonna be the same.
It's not like it was when I was a kid.
There's so many things.
The reality is None of us have any realclue what's going to happen in the future.
So, for me, retirees who continuouslymonitor their plans, retirees who

(11:13):
are open to the fact that they don'tcontrol everything, they can control
their reactions to things, and they can,uh, Uh, they can continuously monitor
things like interest rates and inflationand their spending and their health
and make constant course corrections.
Those are the individuals, I think,who do best of all, but anytime

(11:33):
you're overconfident in any area,it seems to always come back
and smack you in the face later.
Well, except for Roth IRAs.
I'm overconfident.
That's the best single account to own.
And with that
With that, you, so, all right, well, Withthat, I was trying to end the program.
Oh, well, all right, well,all right, I guess we're at
the end of our program then.
I was, uh, I was not as confidentas you that we had reached

(11:55):
the end of our program today.
So, thank you all for joiningus for yet another episode of
The Great Retirement Debate.
Ed, Always fun.
Okay.
Uh, I look forward to havingour next discussion soon.
Yep.
Jeffrey Levine is Chief PlanningOfficer for Buckingham Wealth Partners.
This podcast is for informational andeducational purposes only and should
not be construed as specific investment,accounting, legal, or tax advice.

(12:17):
Certain information mentioned maybe based on third party information
which may become outdated orotherwise superseded without notice.
Third party information is deemedto be reliable but its accuracy and
completeness cannot be guaranteed.
The topic discussed in correspondingarguments are those of the speakers
and may not accurately reflectthose of Buckingham Wealth partners.