Simply Money

Episode Transcript

Speaker 1 (00:06):
Tonight the retirement lie that even savvy investors can begin
to believe. You're listening to simply money presented by all
Worth Financial. I'm Bob Sponseller alone with Brian James. We've
all been told the goal is to just save enough
to retire, But what if that advice is dangerously incomplete?
Tonight will unpack why hitting your quote unquote number is

(00:29):
just the beginning and how market timing, taxes, and inflation
could unravel your retirement if you're not properly prepared. What's
the lie? Brian, what are we talking about here?

Speaker 2 (00:42):
Yeah? That lies? Sometimes we see it in commercials. Sometimes
we hear people talking about it at cocktail parties. Once
I hit my number, I'm all set. There's a lot
of people out there who simply think that there's this
mystery number out there, that that that's all they got
to do. Once they hit that, there they check the
box and all of a sudden they got everything they need.
And a lot of times this number, this number tends
to be slightly higher than they have before, and it

(01:03):
tends to be the next level. Everybody goes, if I
have you know, if I have five hundred thousand, then
when I get to a million, I can go. If
I have a million and a half, then when I
get to two million, I can go. It always tends
to be kind of a milestone when I get to
this mystery number. And sometimes that's wrong, and it's going
to put people in danger in some time, but in
terms of not having enough to fund retirement. But other times,
and honestly, this is more frequent for people have got
some assets. It's unnecessary. It's an arbitrary hitting one of

(01:27):
the desire to hit another milestone that really isn't necessarily
all that relevant. It's just another number out there with
a lot of zeros. But there's other moving parts to this,
right Bob. So it's not only about growing my pile
of money. It's also about preserving that pile, treating a
tax efficiently when I turn on those income streams, and
let's face it, that's the point. It's not a pile
of money anymore. It needs to generate streams of income.

(01:48):
You need streams of mountain water coming down the mountain
in terms of income and making it last for thirty years.

Speaker 1 (01:54):
Well, let's talk about some of these real risks you
know that pop up after retirement. The first one, and
this is a big one, is potential market volatility. If
the market goes down, we have a severe correction, either
early in your retirement or I don't care, even ten
years into retirement and you're withdrawing funds during time during
times of volatility. That's what we call sequence of return risk,

(02:18):
and it can be devastating for the viability of a
long term retirement plan, because, let's face it, Brian, when
people are accumulating money and saving for retirement, they really
don't care about volatility per se. From a numerical standpoint,
all they care about is average rate of return because
they're not taking anything out. When you start living off

(02:41):
that pile of money, you know, turning it into a paycheck,
Volatility can really impact the end result, and oftentimes that's
hard for people to get their arms around. Just understanding
that even if you get the same rate of return
that you did for the twenty to thirty years forty
years your accumulate money, if you get that same rate

(03:02):
of return during retirement with a bunch of volatility mixed in,
that can totally evaporate your money sooner than you might expect.

Speaker 2 (03:10):
Yeah, and I want, I want to hit that term again,
because it sounds like a fancy financial planning term sequence
of returns risk. All it really means, let's translate it
into English, I retire today, the market punches me in
the face tomorrow. This happened to anybody who retired in
twenty twenty one. We immediately had twenty two, which was
one of the five worst years of market history. So
this isn't something to try to attempt to avoid. You can't.

(03:32):
Market's going to do what it wants to do. It
does not care about you or your financial plans or
whatever your goals were. Unmegan difference, it's it's more about
anticipating it and making sure if it does happen to you,
that you can weather the storm. So the whole point
of this is building a financial plan. Let's do and
I always I explain it to my clients this way.
Let's take a look at your resources. You've got your savings,
got your income streams, and then we're going to compare

(03:54):
that with your goals. And we're going to assume, you know,
a very simple let's assume a five to six percent
rate of return. Here's how it looks. If it looks good,
great now let's do it all again, and let's just
pretend instead of that six percent return every year, let's
pretend we lose twenty percent right away. Now, what is
the impact? And very frequently, Bob, what we find is
it wouldn't be any fun. And yes, it's a shot
to the chops for sure, But at the same time,

(04:16):
that doesn't mean it you have to change your plans.
The danger is not that it could happen. The danger
is truly that someone might panic and then take everything
to cash and decide that that's a safer plan until
quote unquote the until the fog clears and everything is
wonderful again. That's a huge danger because then you just
locked in those losses. And each one of those five years, Bob,
there's there's five worst years of the stock market nineteen

(04:37):
thirty eight, twenty two, twenty two, twenty eight, nineteen seventy four.
Every one of them was followed by a year with
strong returns. If you try to time your way out
of it, you're going to leave money on the table.
That is the real risk, not the risk that you
can take the risk of the loss in the first place.
What's another one.

Speaker 1 (04:52):
Another thing we got to watch out for is taxes.
I mean, they are real, and it's a complicated thing.
You got to look at where you're taking your money
from in retirement, not just how much money you have
in taking that simple well, I can take four percent
out or five percent out. You got to look at
required minimum distributions, social Security claiming strategies, potential Medicare search charges.

(05:16):
If your income is too high. You've got to balance
out all those things. And the tax impact can really
add up if you haven't done the proper planning.

Speaker 2 (05:25):
Yep. Another one who's lungevity, right. So I have a
lot of people that'll come and we'll do the plan
and I'll tell them, hey, we're planning out to you know,
early to mid nineties or so, and they'll kind of
laugh and they'll say, wow. They'll give me the Then
they give me the family tree. Here's when everybody died.
Uncle Bob died at seventy two, and my dad died
blah blah blah on down the line. That's fine. And
the phrase that I always use is you've got plenty

(05:45):
of money to die early. That's not really the risk.
The risk is that you're gonna outlive it. So we
need to make sure that we have enough money to
last well into our nineties and make sure that that's
that that's going to keep you keep you going there.
So again, to bring this all back to the beginning,
that number is not the whole story, right, So let's
go through some examples here, Bob, Yeah, Let's.

Speaker 1 (06:06):
Take a quick example. Two couples both retire with say
two million dollars. A couple A has it all in
traditional iras four one k's. Couple B has a mix,
some in a roth ira, some in brokerage accounts. Who
would you say is in better shape? It's couple B
every time because they've got some tax flexibility. Couple A.

(06:29):
Every dollar they withdraw is taxed as ordinary income, and
they hit R and D ahe and boom, bigger tax
bills than they might have even imagined, higher Medicare premiums,
possibly even getting their Social Security tax at the maximum rate,
which it doesn't take much income, by the way, to
make that happen. And that's why it's not just planning

(06:49):
about how much you have, it's about how you access
your money and in what order. And this is where
layering income strategies really gets critical. And you want to
do just planning in advance or retirement to kind of
sketch out how this is really all gonna work, not
just in year one of retirement, but year seven, eight, eighteen,

(07:10):
and twenty eight.

Speaker 2 (07:11):
Yeah, and I would say, so you just gave those
two examples. Couple A has everything in pre tax dollars,
good chunk of money, a couple million dollars, and a
couple BEE has a little bit of everything, some some
tax free and a wroth and some that's capital gains
tax only in a brokerage account and so forth. We
just had a couple of bees in better shape because
they've got flexibility. I'm gonna go ahead and guess Bob
that there's a lot of couple a's out there, because
for a long time, you know, people with several million

(07:32):
dollars in retirement now probably started saving those dollars when
there was no wroth, there was no other choice. Everything
you saved was pre tax, and they stuck with that
plan for a long time. My wife and I, Bob,
were on our way to being couple A. And I
started to see my clients, people who are fifteen twenty
years ahead of me, expressing some frustration because they were
kind of stuck a little bit, and so our decision,
what what Michelle and I are doing is we've decided

(07:54):
to go ahead and start funding some wroth, which is,
you know, we're probably in the highest bracket we'll ever
be in, so we are taking a sacrifice now to
make up for the fact that we weren't going to
have any tax flexibility. And that's an example I take
all my clients through. It's not about how much you have,
it's about how it looks and what the tax treatment
of those various options are.

Speaker 1 (08:11):
You're listening to simply Money presented by all Worth Financial.
I'm Bob Sponseller along with Brian James. All right, let's
pivot now, Brian, what kind of planning should folks be
looking at? What should we be doing, you know, to
set up a what we'll call a smart or wise
retirement plan strategy.

Speaker 2 (08:27):
Yeah, we can't just point out the problems without a solution,
otherwise we're wasting everyone's ear space here. So anyway, a
real retirement plan looks like this. You have already been
you made yourself aware of what your income needs are
going to be year over year. Right, we're not trying
to get this down to the penny. But it's good
to understand what is it like to be you, what
does it cost you to be you for a month,
a year, whatever. You've also identified those goals that are

(08:48):
going to go away. If there's a mortgage in the mix,
don't tie that into your plan for the remaining thirty years.
It's probably not going to last that long. Make sure
you separate those things out and attach inflation where necessary,
such as your living expenses and health, and avoid attaching
inflation such as that mortgage. Don't tie it all together
in one income stream. So you've probably also got a
floor of some predictable income. The social security applies to most.

(09:11):
If you don't have socicurity, you probably have a state
pension or something like that. Perhaps there's an annuity in
the mix, and you also have income from your investments,
which that can be variable, and it's kind of you
turn this bigot on and off when you choose. So
then the next step is you're not trying to withdraw
from the market when it's down. You've got a tax
strategy converting to ross in the early years and then
reducing those future rmds. Managing your medicare IRMA brackets, and

(09:34):
we need to get into detail on IRMA. We'll come
back to that a little bit later, But in any case,
you're taking advantage of tax strategies in those years where
that kind of doughnut hole where you've retired, your salaries
are no longer part of the picture. Maybe you're only
living off of Social Security or pension, or maybe best
case scenario, you've got a couple of years where you
can simply spend down your savings and you have no

(09:56):
taxable ordinary income or at least very little. Those are
the years, and I say the all the time, those
are the years not to celebrate the fact that you're
in a zero bracket or a very low bracket. Those
are the years to do ROTH conversions, take advantage of
those low brackets. Maybe you get up into the twenty
two sometimes some people even go up to the twenty
four percent bracket, which is which can be pretty far
up there, but still taking those years to convert the

(10:18):
roth IRA so that you reduce those IRMA impacts and
the rmds in the future. You're not guessing at this,
you've also stressed tested all this. Like we were talking
about earlier, run your numbers. With the hunky dory output,
we get a nice six percent rate of return. Nothing
bad ever happens again, and then that gives you your baseline.
Run them again with that fifty twenty thirty percent maybe
shot to the chops right up front. Can your plan

(10:39):
still withstand that as long as we get the recovery
and we don't panic. So the takeaway from this, Bob is,
you do need more than a goal. You need a
withdrawal strategy. You need a tax plan, a spending map,
and yes, a contingency plan because life will tend to
throw your curveballs along with the market. It's not just
about one fat number.

Speaker 1 (10:57):
Well in the time to do all this and start
doing all this planning ideally is at least three to
five years prior to when you pull the ripport on retirement,
because that's when we can get creative map out where
your income's going to come from. And people are oftentimes
amazed at the tax impact, the impact of just being

(11:18):
smart about the withdrawal strategy. Here's the all Worth advice.
Retirement doesn't just reward savers, it rewards planners. Stop chasing
just a simple number and start building a strategy that
helps you spend, stay secure and sleep at night. Coming
up next, we're busting some of the biggest money myths
you might still believe yourself, and show you what the

(11:42):
numbers really say. You're listening to Simply Money, presented by
all Worth Financial on fifty five KARC the talk station.
You're listening to Simply Money presented by all Worth Financial
Bob Sponseller along with Brian and James. If you can't
listen to Simply Money every night, subscribe and get our

(12:04):
daily podcast. You can listen the following morning on your
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(12:24):
Straight ahead, in six forty three, we will break down
the pros and cons of owning a time share and
whether that actually fits into a smart financial plan. Brian,
We've all got war stories about these time shares, all right.
There's a lot of conventional wisdom floating around when it
comes to money. But what if we told you that
some of it. Maybe a lot of it is completely wrong.

(12:48):
Tonight we're taking on some of the common financial myths
and using real math to separate fact from fiction. Brian
talk about myth number one and how we deal with
our mortgage payments. This comes up a lot, Bob.

Speaker 2 (13:03):
If I make extra mortgage payments every other day, then
I'm going to save an awful lot of money if
I take all my liquid cash and throw it right
at that debt. So that that's the claim, and it's
kind of an assumption, and it's easy to understand where
people come from. I'm paying interest on my mortgage. Therefore,
that money isn't going to benefit me, It benefits a bank.
And so if I get rid of that, if I
work as hard as I can to get rid of

(13:23):
that earlier in my life, then that is a good thing. Right. Well, yes,
you'll save on interest. But however, if your mortgage is
under four percent or heck, I would even throw out
you know, five or six percent because of the way
things amortize, then that extra couple thousand dollars a month
you're throwing at your mortgage that could be earning you
six to eight percent. In a diversified portfolio, instead of
three and a half four percent in interest savings. And again,

(13:44):
remember how things mortgage, how a mortgage amortizes. If you're
on the back half of a fifteen year mortgage, for example,
then then almost maybe most of your payment is going
toward principle, very very very little is going toward interest,
so you're not really saving that much. Send us a
how about you took it?

Speaker 1 (14:04):
You took the words right out of my mouth. I
run into this a lot. I mean, people are you know,
they've got six, seven, eight years left on a thirty
year mortgage, or four or five years left on a
fifteen year mortgage, and they're still making those extra payments,
and they just don't realize that almost every dollar that
payment is going to pay back principle. And especially if

(14:25):
you're sitting there at a three and a quarter percent,
you know, mortgage and you're paying virtually no interest at
this point, your money's going to do much better investing
it and earning that six to eight percent return in
a diversified portfolio.

Speaker 2 (14:38):
That there's no guarantee about.

Speaker 1 (14:41):
Pardon me.

Speaker 2 (14:42):
Sometimes debt is the best asset, isn't it.

Speaker 1 (14:45):
Yeah? And it gives you options, all right? Myth number two,
and we run into this sometimes you know, getting a
tax refund means you did something right, and Brian, I
don't know about you. I look at this. The people
that celebrate getting that big tax refund, those are people
that generally don't save and budget very well because they look,
all right, I gotta refrom the refund from the irs.

(15:09):
Now I can go take a cruise or take a
more expensive vacation, when in reality, they just gave an
interest free loan to the government for almost a year
and it's their money they're using. And a lot of
people just rationalize this to spend money on things they
can't afford or shouldn't be doing. What say you, yeah, so.

Speaker 2 (15:28):
I completely agree, right, there's no the goal is to
is to not have any kind of return at all,
you know, no refund and you're not writing a check.
I think the closest I ever came to that was
thirty eight bucks about fifteen years ago, and I was
super proud of myself. But it also makes it kind
of a pain. Now it's just a return. I'm not
getting anything out of this because I'm consciously managing my
taxes during the year. But and that's really the goal.

(15:50):
So you want to make sure if you're coming up
with a massive tax return year after year, don't treat that.
And I think people by this point kind of know
in the back of their heads that this isn't this
isn't quite what I think it is. It's not free
money coming from the government. It's money I shouldn't have
given them in the first place, especially now when it
could have been sitting in even just a money market
account earning me four percent as opposed to the nothing
that we used to get three or more years ago.

(16:12):
So let's move on to the third myth here. The
third myth is that if you just pay enough attention,
or if you watch the right TikTok guy, or you
watch the right YouTube videos, you can time that market.
If you just pay a little bit of attention, that's
all you got to do. If you follow the news,
you can buy low and sell. I realistically, if this
were possible, Bob, then we would all have our money
managed by the person who had figured out the game,

(16:34):
because they'd be advertising their fabulous market timing returns and
we would all be we would all be under that
same umbrella. So even professional fund managers cannot do this.
I think market timing has become the new alchemy. Remember
alchemy that was making gold from nothing in the Middle Ages. Well,
I think market timing is now the new alchemy because
everybody talks about it. Those folks selling it to you

(16:54):
on TikTok and YouTube and all that they are not
responsible for. They're simply giving you bullet points go try, go,
try that. They're not gonna sit down and review performance
with you or explain why it didn't work the the
time that you tried it. They're simply trying to keep
your eyes glued to that screen. Another myth, by the
only thing about.

Speaker 1 (17:10):
I'll add to that is the financial media. I mean,
it's a business model designed to get people to think
very short term, what's the market going to do today,
tomorrow or next week, and then here's the individual stocks
that you should buy right now. No one ever comes
back three four weeks from now and says, well I
was wrong about that stock pick, or even if you

(17:31):
were right, no one comes back and tells you when
to sell it after it did go up twenty or
thirty percent. So you got to you got to not
pay attention to short term media stories and take the
bait there to try to time the market. You're listening
to simply Money because iented by all Worth Financial, I'm
Bob spun Seller along with Brian James. Let's get into
myth number four. Uh, this is this is an important one, Brian,

(17:54):
the you know, the old I don't need life insurance
once the kids are grown myth. Uh, talk about some
of the experiences you've had with that. And I've got
my own take on the whole life insurance thing.

Speaker 2 (18:05):
Yeah, So primarily life insurance. Where we start with is Okay,
I've got kids in the mix, and they're gonna need
an awful lot of my money until they're up and
running on their own. And so that means I got
to make sure that there's something happens to me today
that there's income that drops out of the sky that
can service my family, as well as maybe I got
to put money away for college, pay off the mortgage,

(18:26):
so on and so forth. Well, we all get to
a point eventually, the provided things go well, and mostly
they do, where those those needs are have been met
and we don't have to worry about it anymore. But
that doesn't mean insurance doesn't doesn't serve a certain purpose.
So by this time everybody has gotten up and they've
they're all living their own lives in their own situations.
You may have perhaps, you know, maybe you own a
business and one of your children, one of your three

(18:49):
children are maybe involved in that business. That's obviously the
one who's gonna inherit it. But that means you can't
equalize your estate. What are the other two going to
get if the business itself is not going to be liquidated. Well,
that's not exactly fair. Most people don't want that outcome.
That's where life insurance can serve a purpose of equalizing
your state. Guess it's an expense, and it's no longer
about protecting somebody in the same manner you were before.

(19:11):
It's more about just making sure everybody is treated the
way you would want them to be treated. So, when
we've got people out there with multimillion dollar networks, there
is a lot of moving parts to it, and life
insurance can kind of be used to kind of spackle
over any gaps in between the different situations.

Speaker 1 (19:26):
Well, and the one thing I want to throw in
there on life insurance is to me life insurance functions
really well as a tax free benefit to pay for
any future long term care costs. I mean, even if
you've got a whole pile of money and there's a
long term care need and you have to spend down
some of your assets to take care of one of
the spouses. Along comes that life insurance policy that you

(19:48):
funded for thirty forty years, permanent life insurance, and that'll
backfill that a state. Here's the all Worth advice. Smart
money isn't just about what you know. It's about unlearning
what sometimes you think you know. Coming out next, the
costly mistakes divorcing couples often make, and how you could
protect your long term wealth, especially if you built a

(20:12):
healthy nest egg. You're listening to Simply Money presented by
all Worth Financial on fifty five AIRC the talk station.
You're listening to Simply Money presented by all Worth Financial.
I'm Pop's fund seller along with Brian James. Divorce. For sure,

(20:33):
it's a legal proceeding and it's an emotional process, but
it's also at its core, a massive financial transaction, and
for couples that have established a healthy nest egg, the
stakes can be incredibly high. Brian, let's get into some
of the mistakes people make when they're caught up in
the emotion and I'll say the legal moment of getting

(20:56):
through that divorce and some of the mistakes people don't
think about and huge mistakes people make if they proceed
too quickly and without proper guidance.

Speaker 2 (21:07):
This first mistake, Bob, this can affect any any any
married couple, whether there's a divorce in the offing or not.
And that's not understanding the full financial picture. Most of
the time we've got one spouse who's truly interested in
the finances and the other doesn't want anything to do
with it. And that actually that's not a terrible thing
because that that can people can get along a little
bit better when there's a separation of duties. If you want,

(21:29):
if you had two married couples, or if you have
two married people who both want to be one hundred
percent involved in everything, you're probably looking at a divorce.
But better relationships of course, learn to kind of share
the load. But that can lead to one spouse really
having absolutely no idea where anything is and uh and
and what what needs to happen. So in the case
of a divorce, then obviously that can leave leavest somebody

(21:52):
very very, very exposed in terms of just not knowing
what the family net worth was in the first place.
So we see things like, you know, I might forget
that my spouse has a deferred comp plan out there
because I've never I don't see the statements, and I
never know that I'm not informed of any updates on it.
It's not a pile of money that's available to us now,
so I kind of forget that it exists and it
doesn't get called out in divorce proceedings. That is real

(22:15):
money you're leaving on the table, So make sure that
you know exactly where all those things are before anything
gets negotiated. Make sure you have a clear, clear, clear
detailed view of all your accounts, all the debts, the
income streams, and the assets. And actually, let's zero in
on debts for a second. If a debt was incurred
by your spouse, then that has nothing to do with you. You
don't necessarily have to have anything to do with it.
If your name is not on it. Just because you

(22:36):
were married to that person does not mean you are
subject to that debt. You'll need a lawyer to kind
of look at the specific situation and make sure and
sometimes in extreme cases, Bob, a forensic accountant can really
help kind of unlook, uncover all of those hidden assets.
What about emotions, Bob, Can that get in the way.

Speaker 1 (22:53):
Well, this is one I'm going through right now with
a client, and it's the emotion around keeping the house.
And it's understandable. You raise your kids there and you
got a lot of memories. But maintaining a large home,
or really any home on one income can quickly drain
financial resources, and people sometimes just forget the reality of this.

(23:14):
Homes are expensive to keep. You got the mortgage, if
there's still a mortgage, property taxes, insurance upkeep. I think
everybody knows the drill here. It can be expensive, and
often is. You got to run the numbers if you're
going if you're about to get a divorce. In some cases,
selling that home, splitting up the proceeds and the equity
can be the smartest move financially, and yet you got

(23:37):
to pull the ripcord on the emotions a little bit
here and give up some of those memories. But you
make new memories somewhere else, and in the process, you
don't bleed yourself dry by spending down all your resources,
just by saying I gotta have that home and I
got to keep that home.

Speaker 2 (23:55):
Yeah. And another one, let's move on to the third
one here has to do with taxes. Understand the tax
implications of all the assets that you have. So, for example,
a five hundred thousand dollars traditional pre tax IRA is
not the same as a five hundred thousand dollars bank
savings account or a five hundred thousand dollars taxable brokerage account.
One is pre tax, the other is post tax. So
in other words, if there's a pre tax IRA in

(24:19):
these divorce proceedings, then all of a sudden, the IRS
is a party to this divorce because they're going to
get a chunk too. So your five hundred thousand dollars
IRA may only be three fifty to four hundred thousand
after taxes. So take that into consideration. We've seen clients
a lot of times they'll just say, let's keep it simple.
We've got roughly a half million dollars in this taxable account,
and there's also a half million dollars in the IRA.

(24:40):
You take one, i'll take the other. We don't have
to split anything up. That's dangerous because the person who
takes that traditional IRA might be attracted to the fact that, oh,
this one doesn't generate any taxable activity. That's a good thing.
I want that now, But that can set them up
in the future for some more significant situations with regard
to rm ds and IRMA and some other things as well.

(25:01):
So understand the tax impact of the various things that
you are considering splitting up. Don't just look at dollar amounts.
There's more to it than that. You're listening to Worth.

Speaker 1 (25:11):
The Money presented by all Worth Financial on Bob Sponsller
alone with Brian James all Right, mistake number four and
we see this often Brian failing to update estate planning
documents and beneficiary designations following a divorce. You know, people
again they're wrung out emotionally from the whole process and
they forget you know, I've got my wife as my

(25:32):
former wife now as one hundred percent primary beneficiary on
my four oh one K. You got to go in
and change your powers of attorney, update your wills, trust
if you have it, and beneficiary is on all your
retirement plans and iras to make sure you're not leaving
money to someone you no longer want to leave it.

Speaker 2 (25:51):
Yeah, I got a quick story on that too, So
it's not not very often that that that gets updated.
So when we sit down with people who are newly
married and do a financial plan for the new household
a new situation, we always log into four oh and
k's and look at allocations and all that, and then
I'll say, hey, let's check the beneficiaries. And then I
have one spouse who is seeing their new spouse with
their ex spouse still listed as a beneficiary, And it

(26:13):
makes for an awkward yet somewhat educational discussion and it
really does kind of motivate some change there. So not
a bad thing, but it can be an awkward moment
there and planning for a and during a second marriage.

Speaker 1 (26:23):
Here's the all Worth advice. When your marriage ends, your
financial life doesn't have to completely unravel. Slow down, get
good advice and protect your future self. Coming up next,
we will unpack the hidden truths around time shares that
every smart investor should know before signing up. You're listening
to Simply Money presented by all Worth Financial on fifty

(26:46):
five KRC the talk stations listening to Simply Money presented
by Allworth Financial. I'm bop spun seller along with Brian James.
When you're sipping on that cocktail on the beach, maybe
on your annual vacation, the idea of buying that time

(27:06):
share can feel like an easy yes. And I've been there,
especially on the last day of vacation, let's say in Hawaii,
life's just perfect and along comes this sales guy to
just offer to extend your vacation for what might seem
like an eternity. But like most financial decisions, Brian, there's

(27:27):
a lot more under the surface when we get into
these time shares.

Speaker 2 (27:31):
Yeah, and then they're not all negative. Right, Let's I
don't only think we're bashing time shares of that kind
of thing. There's just an awful lot to pay attention to.
So let's kind of go over with why do people
do this in the first place. Well, makes your vacations predictable.
You know where you're going, you know, and you don't
really want to have to research or you maybe you
don't have time to put all the thought into, you know,
into a vacation. And if a timeshare and with a

(27:53):
facility you like, and you know a company that you've
enjoyed the past, that can be a good thing. They
tend to be a little more upscale. So these are
nicer places, larger living spaces, nicer, bigger pools, recreational facilities,
all those kinds of things.

Speaker 1 (28:05):
Uh.

Speaker 2 (28:05):
And you have the ability to kind of exchange and
move these things around. So maybe maybe you're in the
mood to go to Orlando and go hit some of
the hit some of the amusement parks there, or maybe
sometime you want to get out in nature. So out
to Lake Tahoe is just something a little bit different.
And one more good thing is that you know these
they locked in the cost. They also make the cost predictable.
You know what you're paying. And you know, I do

(28:26):
have clients who are very happy with these things.

Speaker 1 (28:28):
Uh.

Speaker 2 (28:29):
If you if you like the places you're going, and
you have friends in these places, and you just know
you're going to be hitting these places pretty often, it
can be a good thing. But that's not why we're
talking about them, is it, Bob.

Speaker 1 (28:38):
Well, well, Brian, let's let's get down to brass tacks here.
Out of all the clients that you work with that
have time shares, uh, what would you say, how many
of them are happy with them?

Speaker 2 (28:49):
Bob?

Speaker 1 (28:50):
And how many of them wish they had never touched them.

Speaker 2 (28:53):
I have two I have too. That that that, and
it's interesting every time this comes up they both treat
it the same way. They lead by saying, we love
our time show. We have a time sharp, but we
love it. We love it because they know that the
reaction they get from their friends and family that they
own one, it's, oh my gosh, I'm so sorry that
you're stuck in that situation. And they go, no, we
kind of like it. It works out fine, And that's great
if that's you, But let's talk about the people for

(29:13):
whom you know that is not the case. So what
are the cons One of the big one is limited liquidity,
meaning you can't get out of these things very easily.
They're very difficult to resell. There really isn't much of
a secondary market for these. It seems like there should be,
right if I want to dump this, you know, if
they're so bad, you would you would think that people would,
you know, be able to get a great bargain on it,

(29:34):
But most people aren't comfortable. They think of it sort
of like real estate. I shouldn't have to take a
loss on it, so therefore I'm not going to come
down on the price on it. So, but it's not
real estate. You're not going to see it appreciate like
an actual house in the Smokey's or you know, a
condo in Hilton Head or something like that.

Speaker 1 (29:51):
Well, I'll share, I'll share what I think about it.
I mean, in the years I've been doing this and
I've had a bunch of clients where we look at
their balance sheet and there's always that time share that
shows up there. Most of my clients they never mention it.
They never talk about how they love the vacation with
the timechair. They always just kind of mutter, almost in
a state of regret. Yeah, we got that time chair.

(30:13):
We think it might be worth eighteen thousand dollars. I
throw it on the balance sheet and we move on.
I never hear anyone talk positively about these things. Maybe
I'm just missing a boat. Let's talk about some other cons.
The other one is ongoing fees. You know, you're not
just paying for the property, you're also paying maintenance fees,
which could be hundreds or even thousands of dollars a

(30:34):
year and are subject to increase. And that's before special
assessments come into play. If the property needs to be
overhauled or upgraded, same kind of assessments that happen with
vacation condos. They'll make a quote unquote assessment and you
got to write a check to keep up with everything.

Speaker 2 (30:53):
Yeah, you'll get you still have it. You'll still have
those assessments of course on a property. But if you
actually own the property outright, you have something to sell
as well. But you're gonna see, you know, when when
hurricanes hit and insurance goes up, that will come through
to you, even though you only own a time share,
not the actual property.

Speaker 1 (31:12):
All right. The other big one that I run into
is just limited flexibility, you know. Even some of these
Even though some of these timeshare systems offer trade ins,
which are great, oftentimes you're locked into a specific week
or a specific resort or to And let's face it,
if life throws you a curveball like a family wedding
or a health issue, or your kids end up getting

(31:35):
you know, super involved in travel, sports or whatever, like
what happened to me and my kids, we didn't have
time to do any of these kind of vacations. I
was living life on a baseball field for about thirty
years in the summer, So you got to look at
limited flexibility as a potential cons on these. Do you
run into the same thing Brian.

Speaker 2 (31:56):
Oh, yeah, for sure, because again you might if you
get bored. What if you're tired of the places that
you have available to you, then what do you do?
You're kind of stuck. Like we said, there's not much
of a secondary market for these, and if you're bored
with the places that you're that you're getting, that you
have access to, you don't want to do it anymore. Well,
you're one of two things is going to happen, and
neither of them is good. You are either going to

(32:17):
go anyway. Well we got that time share. I guess
we got to go to the Smokey's again, or we
got to go to Scottsdale. I'm really kind of sick
of it, but we got to do it because you're
already paid for it, and that's not that doesn't make
for a relaxing fund vacation. Or you're you're going to
ignore it completely and at that point you started to
kind of waste your money and you're you're sort of
playing right into the hands of those who want to
make a profit on it. Because if they have your
money and you're not consuming any of their resources, which

(32:39):
is just more more to the bottom line for the
people who sell these things. So not a lot of
flexibility out there. And the other thing member is a
lot of You're going to be talking to salespeople who
are extremely highly well trained, and they're probably trained more
on psychology than they are on actual sales. It's a
it's a very very very different approach that that you
might be accustomed to. And the contracts you're going to sign,

(33:00):
you better believe there's a lot of legalese in there
and you are not just signing a you know, a
rental agreement with Airbnb for a week. There. These are multipage,
lots of legal ease, and lots of Latin in there
and all kinds of things. So just understand what it
is that you're getting into before you sign on the
dotted line.

Speaker 1 (33:17):
Yeah, be careful of that sales pitch. Somebody comes along
offering to extend your wonderful vacation for another four days
for quote unquote free, as long as you go to
one more sales pitch for the time share, be careful
of that. Here's the all Worth advice. If you can't
sell it easily and it costs you annually. It's generally
not an asset, it's a liability. Think twice before buying

(33:40):
into a vacation you may end up out growing. Coming
up next Brian's bottom Line. You're listening to Simply Money,
presented by all Worth Financial on fifty five KRC the
talk station. You're listening to Simply Money said by all

(34:00):
Worth Financial, Lump Pop spun Seller along with Brian James,
and it's time for Brian's bottom Line where he's going
to educate educate us on this dreaded IRMA surplus tax. Brian, Uh, yeah,
this is an important topic.

Speaker 2 (34:16):
So if you are listening to this show, first off,
thank you, But that means you are probably somebody who
was interested in financial education and learning where the learning,
where you know the how all the moving parts of
financial planning work and so forth. Something you're going to
run across sooner or later is IRMA. IRMA I r
m A stands for income related monthly adjustment amount and

(34:38):
it has to do with your Medicare premiums in your income.
So this came about and it's also what we're getting
at is it's a it's a it could be an
additional expense for you'll need to kind of budget for.
Came about through the Medicare Modernization Act way back in
two thousand and three, and the first time anybody had
to deal with it was seven. So, you know, we
talk all the time about, well, what happens when you know,
what happens when they start doing needs based socialecurity, needs

(35:00):
reads based Medicare? What happens when that comes Bob, Well,
the answer is, we already do it. That's basically what
this is. IRMA was introduced to require higher income Medicare
beneficiaries to pay a little bit more for their Medicare
Part D, and now it also affects Part D, so
ba's hospitalization and D is the drug side. This was
designed to help ensure the sustainability of the program, right,

(35:20):
so we need there's a hole in the bucket. These
programs that we've put in place for retirees don't necessarily
pay for themselves, and that's the headline we hear about frequently.
One of the attempts to fix them was this IRMA.
So what happened was the income thresholds only applied to
Part B first and then Eventually, if you're modified adjusted
gross income exceeded certain thresholds, you wound up paying some

(35:41):
higher premiums. And then the Affordable Care Act back in
twenty ten expanded IRMA to start covering Medicare Part D.
So what happens though, and here's one of things that
gets confusing, is there's a two year look back, So
IRMA is calculated using your modified adjusted gross income from
two years ago. So somebody here in twenty twenty five,
whatever their Medicare premium is they're paying, was triggered by

(36:04):
their modified adjusted gross income in twenty twenty three. So
that makes it tough to kind of play games and
move things around because you don't necessarily know what your
situation is going to be years two years from now,
so I don't really know what I can do now
to kind of handle that. So they do update the
income brackets and we get to we get to know,

(36:24):
you know, what that is going to be two years
in advance. And this everybody's Medicare premium starts around one
hundred and eighty dollars and then it goes up from
there in terms of based on what your income bracket is.
So what does this actually do. So how do we
how do we know how to deal with this? Well,
remember withdrawals from your traditional iras, if you generate capital gains,

(36:46):
traditional irais of course taxes ordinary income. If you generate
capital gains and your taxable accounts and you're doing roth conversions,
all of those things will it will affect your modified
adjusted gross income and that can push you over those
IRMA thresholds. You do have the ability to appeal, so
if you do want to make an argument, there's a
form out there where you can go back and say, hey,
that's not what my income was two years ago, it

(37:08):
was more this, and you make your case and then
you can hopefully get it reduced. So what can we
do about this? Well, there are there's nothing you can
do to wipe it out. I do. We do get
questions all the time why I'm paying taxes on these
rm ds? You know what can I do to you know,
to kind of reduce my ERMA threshold? And it's no
different than things that you would do anyway to reduce

(37:30):
your taxes or not necessarily anything special about it, but
some interesting things if you if you are charitably inclined,
you can do It's called a QCD a qualified charitable distribution,
you have to be seventy and a half. This is
different than the RMD AG RMDA is seventy three. QCD
age is seventy and a half. You can transfer up
to one hundred thousand dollars per year directly from an

(37:50):
IRA to a qualified charity. So again you're giving money away.
This is assuming you were already charitably inclined. If you
wish to do so from your IRA directly, those dollar
amounts get excluded from your taxable income of course, because
you're donating it to a charity. Therefore, they do not
affect your your IRMA calculation. So there's there's a there's
a reason to coordinate your rm D not mess up

(38:11):
your IRMA situation and also benefit of charity along the way.
But if you are if you have some time and
you're hearing these words now, and you're kind of and
you've heard people who are older than you kind of
complaining about IRMA, then what you might want to look
at is doing your WROTH conversions. Now, if you're in
that window where you've got a little bit of time
before your your next highest income bracket's going to come in,

(38:31):
then you might want to be looking at Roth conversions
right now.

Speaker 1 (38:35):
Brian, I had a meeting yesterday going over exactly this
topic and all the things we talked about in this
show today, and you can run there's great software you
can use to just run those Wroth conversions and other
income right up to the line without crossing it and
getting yourself into an irma situation. Thanks for listening. You've
been listening to Simply Money and presented by Allworth Financial

(38:56):
on fifty five KRC, the talk station