Episode Transcript
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Speaker 1 (00:06):
Tonight, how does your four to one K balance compare
to everyone else's? The new numbers are out and quite frankly,
we could care less. You're listening to Simply Money, presented
by all Worth Financial. I'm Bob Sponsller along with Brian James.
Tonight we're breaking down one of those headlines that always
gets clicks and Brian, this story seems to come out
(00:27):
now about.
Speaker 2 (00:28):
Every six weeks.
Speaker 1 (00:29):
How does your four to one K balance stack up
to the national average? And yes, just like clockwork, every
time this number comes out, it sets off a wave
of financial comparison.
Speaker 2 (00:40):
You know, are we doing enough? Are we behind? Are
we ahead? Or should we be panicking? Let's dig into
those numbers. Brian.
Speaker 3 (00:49):
Yeah, this is a common common question and I'm sure
Bob you hear it too, very frequently. When I'm sitting
down with a client reviewing a plan or building a plan,
brand new plan for a brand new client, They'll oh,
everybody wants to so how do we compare? How do
we look compared to everybody else? And the I'm not
really sure how to answer it, because, knowing what we
know about the state of society in America, if you
(01:09):
got anything then you're doing a lot better than the rest.
So the kind of people who have have solid four
oh one ks and they've saved a lot of money,
I mean, it's no comparison to you know, to the
to the rest of the world. So here's how the
numbers are coming out. Vanguard has put out their their
annual How America Saves Report, and the average four oh
one K balance is one hundred and forty seven thousand dollars.
(01:31):
But that's not particularly useful because that doesn't mean anything
because there's forty years. There's a forty year range in
the ages of people they're asking. So let's narrow that
down a little bit. If you're between thirty five and
forty four, then ninety seven thousand dollars is the average.
But that's that's you're at the very beginning. At that point,
you are, as they tell my clients all the time,
you are standing on the tee of a six hundred
(01:51):
yard golf hole, and there is very little question about
which club you're gonna pull out of the bag. You're
gonna pull out the fat one, You're gonna swing out
of your shoes. You're at the beginning. You're gonna be aggressive,
you're gonna ride the waves a little bit. Now we
can go down with Brian.
Speaker 1 (02:01):
If you're gonna used golf analogies with me, a six
hundred yard hole, it takes me two weeks to finish
that hole when you watch how I hit a golf ball.
Speaker 3 (02:09):
But go ahead, Oh no, that that's why we're on
the radio, not on video, and nobody ever actually sees
us play golf. We're better at analogies than the actual golf.
So let's look at another age range here. If you're
sixty five and older, according to Vanguard, it's two hundred
and eighty five thousand on average. If that's you, then
you're in a different situation. The data says your average,
but two hundred and eighty five thousand dollars, you know
(02:29):
that may or may not be enough to retire unless
you've got a pension in the mixed social security and
really no debt and you're planning on keeping a pretty
tight budget too.
Speaker 2 (02:40):
Yeah.
Speaker 1 (02:41):
Now let's go to the other end of the spectrum.
You got somebody and we talk to folks like this
all the time. They come in and they say, for example, hey,
I've got we've got.
Speaker 2 (02:49):
One point two million dollars saved. We're rich. We're good.
Speaker 1 (02:53):
You know, we're ahead of the game according to the averages.
But that's you know, we got to remind people the
game we're playing here is not comparison game. The game
we're playing here is putting together a strategy based on
your specific goals. And once you hit that level, you
know where you got some money in there. You got
to get out of that comparison game and start looking
(03:14):
at income planning, things like tax strategies, longevity risk, and
actually look at what you're planning to spend in retirement.
Because I continue to bang the table on this one.
I'm always shocked at the number of people that come
into our office to start to do retirement planning and
they have no idea what they spend every month because
(03:35):
they're just taking whatever their current paycheck is, you know,
net of all the tax withholdings and deductions and everything else,
and that's what they spend. And for folks that have
a high income while they're working, that can also be
a false sense of security just assuming that that's just
going to continue, you know, forever, and some people are
(03:55):
surprised when they look at, well, you don't have enough
money to replace the pay check if you really do
expect to keep, say, spending at the rate you're spending
right now, Yeah, I think what you're.
Speaker 3 (04:07):
Saying there, And this is this is where people should
be thinking. Right. We all like to compare our piles.
How is my pile of money compared to everybody else's
pile of money? Do I have a bigger pile? That's
not what it's about, though, It's about the spending. So,
you know, let's look at these two folks we just
discussed with the one point two million dollars at age
sixty five versus the two hundred and eighty five thousand.
If the individual or the family with the two hundred
(04:28):
and eighty five thousand in four to one k iras,
if they have a couple social Security checks totaling you know,
four thousand dollars and they spend three, those folks are fine.
They're going to be okay with really without much question.
That means the two eighty five gets to continue to
grow and it'll pay off the lump some stuff, the vacations,
buying a carving now and then that kind of thing. Now,
let's look at that person with one point two million.
If they spend like they have ten million, they're not
(04:51):
going to be okay. So it's it's all about the math.
It's not about the pile. It's about the trickle that
needs to come out of it. You can drain it
to nothing, or you can allow it to continue to
grow while still paying your bills. That's where the spending
comes in that Bible's referencing.
Speaker 2 (05:04):
Well.
Speaker 1 (05:04):
Another thing to point out from this Vanguard study that
I think is useful and is very interesting at least
to me, is participation rates. Vanguard says that only six
and ten eligible workers are even participating in their four
to one K and Brian, I've got to assume that
most of these four to one K plans have matching
provisions in them. So six and ten people not only
(05:26):
are they not putting any of their own money away,
but you know, if the average match is say fifty
cents on the dollar up to five or six percent
of pay, they're literally leaving dollars on the table, free money,
fifty percent return on your money because they aren't even
signed up. They're not participating. So you know, these articles
can get a little unsettling because they can cause a
(05:48):
series of different emotions. You know, if you're behind and
or haven't got started, or if you're one of those
people that aren't participating, maybe you just throw your hands
up and say, I just give up.
Speaker 2 (05:58):
I'll never get there. I'll never get there.
Speaker 1 (06:00):
Or maybe you think you need to save a whole
lot more when maybe you don't have to. And and
that's kind of the point we're driving home here. Don't
compare yourself to other people. Put an actual plan together
based on your individual goals and objectives, and see how
that is stacking up. You're listening to Simply Money, presented
by all Worth Financial. I'm Bob sponsoring along with Brian James.
(06:23):
All right, Brian, we talked about kind of this data
to kind of ignore and brush to the side. What
are the things that we should be asking when we
do responsible financial planning as it relates to our four
one K plan and everything else we're putting away for retirement.
Speaker 3 (06:38):
Yeah, this was This was what I was hinting at
before I kind of stole the lead here. But rather
than asking how big is my pile and how big
is it compared to other people what's the average pile
of money? Ask the question do I know how much
income I'll need in retirement, you know, that's all. That's
almost a that's a prerequisite to everything, no matter how
much money you have. People who have millions and bazillions
of dollars, you know, generally speaking, don't have any idea
(07:00):
what they spend because they've never been forced to. The more,
there's an inverse relationship between the size of your pile
of money and how much knowledge you have about your
monthly budget. If you've got enough money where you don't
really have to pay attention to how their bills are
getting paid, You just know they are getting paid. That's
a good, happy situation, But it does mean that you
can't really anticipate, you know, what about healthcare costs? What
about taxes? Inflation? And also have I stress tested my
(07:22):
retirement for a down market? All of that starts with
what do I need this pile of money in these
streams of income?
Speaker 2 (07:29):
Right?
Speaker 3 (07:29):
All benefits are All financial assets are either piles of
money for owen kiras, investments, et cetera, or streams of
income social security, pension, part time work, whatever you're going
to do. But none of that matters. None of those
data points matter. If I have no idea what target
I'm shooting at? Meaning, do I have any idea what
it costs my household to be my household for a month.
Speaker 1 (07:49):
Well, and just to piggyback on those points, what we're
talking about here is getting ahead of the game here,
you know, years ahead of when you plan to retire
and actually start to craft in income strategy. And the
folks that are the most successful from a tax standpoint
and a retirement income standpoint, they've got different piles of
(08:09):
money and they've had somebody develop a strategy for them
where they can take those streams of income, as you say,
from different sources like rowth iras, some from your four
oh one K, some from social security, some from a
pension if you have it, and then some from just
a good old after tax brokerage fund. You know, there's
different levers we can pull to manage your tax situation
(08:33):
efficients efficiently, and that's how we help people, you know,
cross the finish line successfully.
Speaker 3 (08:39):
Yeah, and another point out of this article, remember this
is coming from Vanguard's four oh one K division. Fidelity
does this too from time to time because they're two
of the largest four to one K providers out there.
They know exactly what millions upon millions of people have
in their four oh one k is because they hold
those accounts, but they have no idea what people have outside,
So they're not really talking about someone's a full situation.
(09:01):
They're simply talking about the individual four oh one K
balances they see for the participants, the employee participants that
for whom they accustody those assets. Those individual people could
have roth I arrays in the mix. They could have
other brokerage accounts, other old four oh one k's that
have nothing to do with Fidelity and Vanguard. So let's
not pay too much attention to these, to these kind
of sort of where we cherry picked one data point.
Speaker 1 (09:23):
Or they could have rich parents and grandparents and get
wealthy the old fashioned way inherit it right.
Speaker 3 (09:29):
Brian Never, Yeah, that's true. How often has it happen
where you've have somebody walks in the door, Bob, and
you think you have you'd have a stab at what
their situation is, and you find out that some business
was sold or they inherited something from a long lost
uncle or aunt, and it's a whole different story instantaneously.
There is so much money in this country flying around
all different directions. It's very, very unpredictable.
Speaker 1 (09:50):
The point we're trying to make here is it really
does not matter at all what some national average study says.
You're not retiring based on what your neighbor saved or
what you think people in your neighborhood have. You're retiring
based on your own expenses, your own lifestyle, and your
own life goals. Here's the all Worth advice. Don't compare
(10:11):
your four oh one k to a national average. Compare
it to the future you want for yourself and build
that plan. Build your plan around your desired future. Coming
up next, a change is coming for some retirement accounts
and it could mean losing a major tax break. Will
tell you what that's all about and how to plan
(10:31):
around it. Next, you're listening to Simply Money presented by
all Worth Financial on fifty five KRC the talk station.
You're listening to Simply Money presented by all Worth Financial
on Bob Sponseller along with Brian James.
Speaker 2 (10:49):
If you can't listen to.
Speaker 1 (10:49):
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Speaker 2 (10:59):
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Speaker 1 (11:01):
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Speaker 2 (11:07):
Straight ahead at six.
Speaker 1 (11:08):
Forty three, a hidden door to more investing freedom if
you know where to look, all right, If you're fifty
years old or older and you're playing catch up on
your four to one K contributions, you're probably adding an extra,
say seventy five hundred dollars a year. But starting in
twenty twenty six and twenty twenty six is just around
(11:29):
the corner, Brian. If you're a high earner, that money
cannot go into the pre tax bucket anymore. The IRS
wants it going straight into the Wroth options. So that
changes the math, and it might mean some smart moves
need to be made now.
Speaker 3 (11:45):
Yep. This is one of those little elements of the
Secure Act, right so I don't even remember what secure
stands for anymore, but this is our second version of
the Secure Act. And they was originally, you know, the
kind of pitched as both of these were, let's put
people in a better place for retirement, and then here's
seventy two other little things. We're gonna sneak in there anyway,
just because we can't so currently as once you're over fifty,
(12:10):
you can currently put another seventy five hundred dollars in
the current limit is twenty two to five for everybody
under the sun, and then an extra seventy five hundred
for if you're over fifty, and the current rule is
all of that you that entire thirty thousand in that
example could go into the WROTH side, or it could
go into the pre tax traditional side. That is a
choice that you have based on your own situations. The
(12:32):
change that's coming in twenty twenty six. If you have more,
if you make more than one hundred and forty forty
five thousand dollars in wages, right, not total comp but
just wages, your four oh one k catch up contributions,
that extra seventy five hundred currently that has to go
into a WROTH four oh one k. So what this
means this is a sneaky way to make sure the
(12:52):
irs and the government gets the taxes that they need.
They're basically saying, yeah, you can still save this money,
but you're gonna have to pay taxes on it, meaning
these will be after tax contributions. That's what a roth is.
So that seventy five hundred dollars is still going to
be taxable as income. You'll see that come through and
you're withholding you no longer will have the choice currently
unless they change this, you won't have the choice for
that upfront tax deduction. And the folks who are in
(13:14):
this situation where they can afford to be putting in
that full that full catchup contribution, including the original contribution,
are usually the ones in the higher brackets anyway, So
the irs giveth and it taketh away.
Speaker 1 (13:28):
Yeah, and that's something that I think very few people
really know is coming down the pike, Brian. Most people
that come in and talk to us have no idea
that this change is coming. And to your point, we
do have a lot of high income clients that are
taking full advantage maxing out coming in twenty twenty six,
and it's something to be aware of. You're listening to
(13:50):
Simply Money presented by all Worth Financial Bob Sponsler along
with Brian James.
Speaker 2 (13:55):
All Right, Brian, what should we do about it?
Speaker 1 (13:56):
We've just defined the quote unquote problem in the change
that's coming down the road. What should we be doing
about it here in the next six months as we
navigate through the rest of twenty twenty five.
Speaker 3 (14:08):
Yeah, if we don't provide answers to these things, we're
really just griping on the radio, which doesn't helpful to anybody.
So what should you do now? If this is you,
if you feel like you're likely to face higher tax
rates in retirement, or if the Tax Cuts and Jobs
Act tax Act expire, those cuts expire, that's the one
from twenty seventeen, then potentially converting IRA money now to
(14:28):
ROTH could lock in today's tax rates. So this would
be my favorite situation where this comes up is for
people who have retired and perhaps they put themselves in
a position where they can spend down some you know,
kind of tax free assets in a sense. Right, So
they've built up some cash, maybe a couple hundred thousand dollars.
Often we see and frequently that comes from when people retire,
(14:51):
that is around the age they sometimes inherit things from
their parents, and so there could be a pile of
cash from that, and I'll frequently tell them, look, let's
just spend that down. Let's throw it in a high
yield savings acut out. We'll pick your bank, favorite bank,
I don't really care. Just get four or five percent
on it now and spend that down. That means you're
not generating any income at all, no social security. We
don't have to turn that spigot on yet, we're not
(15:11):
taking money out of our taxable iras or anything because
we've got plenty of money on the side. That means
we're in a zero bracket. That is not a reason
to spike the football. A zero bracket is a missed opportunity.
We should be filling up those brackets ten twenty two,
maybe even twenty four percent, depending your situation, and converting
even up to a couple hundred thousand dollars, maybe even
(15:31):
more based in your situation, convert that to roth at
lower brackets than you've seen in your entire working career.
Now that you are simply living off of savings, that
will help you. It's going to reduce your required minimum
distributions that are going to kick in at age seventy
three or seventy five, depending on when you were born,
way in the way ten years into the future, ten
fifteen years rather and it's also going to pass more
(15:53):
efficiently to your kids rather than leaving that traditional IRA
out there to continue to grow. And a lot of
people no Now, the one of the other changes that
came out of that act was anybody who passes after
twenty twenty, their errors of an IRA will have to
pay taxes and withdraw liquidate that IRA completely in ten years.
(16:13):
If that's a wroth, it still holds true. But the
fun thing about it is that they can also leave
a huge pile of money in there to continue to
grow that roth tax free after your death. So with
the proper amount of tax planning, there's a lot of
options out there for somebody to take advantage of what's available.
Speaker 1 (16:31):
All Right, you talked a little bit about folks that
are retired and the ROTH conversions and all that. Let's
pivot back to what folks that are really trying to
sock money away here pre retirement. You know, we just
talk about what they can't do in twenty twenty six
and what I'm leading into, Brian, and I know you've
got a lot of experience with this, this concept of
a megabackdoor wroth. A lot of people don't understand that
(16:53):
that even exists or how it works. Will you walk
us through how that works and maybe cite an actual
client exam because this is a powerful tool.
Speaker 3 (17:01):
Absolutely, this is one of my favorite things to talk about.
It's not available to everybody. It is a per employer,
per plan feature. But if your four to oh one
K allows after tax contributions, right there, there are three flavors,
believe it or not, there are three flavors of tax
taxation of dollars that flow into a four oh one K,
you've got your pre tax That's what's been there since
(17:23):
the beginning of retirement plans. Right if I put money away,
I save it, then I'm not going to pay I
get to deducted this year, not paying taxes on it.
That's always been there. In the past twenty years, we've
now had the ability to add ROTH contributions, which means
I don't get a deduction, I'm gonna pay taxes on
it this year that I'm contributing it, but it will
grow tax free forever. And that's what I tell all
of my client's kids. People are in their twenties thirties,
(17:44):
when you're just getting started, you're in a low bracket
rothroth rothroth roth all day long, build up that pile
of tax free money so that eventually you'll be in
a higher bracket when you have higher earnings, but you've
got a pile of tax free money that can grow
for forty forty five, maybe even fifty years for you.
So that's the second flavor. The third flavor is what
we're talking about, and it's after tax contributions sometimes called voluntary.
(18:07):
This is sort of a hybrid of both. So if
I put money in after tax, then I am paying
taxes on it, hence the name. But the difference is
the growth on an after tax contribution. It's different from WROTH.
The growth on an after tax contribution is taxable as
income when I pull it out, So it's sort of
a hybrid between pre tax and WROTH. But the trick
(18:28):
here is that you can make after tax contributions those
are not subject to that to that four h one
K limit that we're all accustomed to, somewhere in the
thirty thousand dollars range if you're over fifty less than that,
if you're under, you can put a way up to
sixty six to seventy three thousand dollars into your plan
by maxing out all of those different sources and anything
(18:49):
that is labeled as after tax, you can then convert
to WROTH, meaning if you've got the ability to say
goodbye to this cash flow. If you have the ability
to sock it away somewhere, you literally can put sixty
seven sixty two seventy thousand dollars away in your four
to one K and have a substantial pile of that
going onto the roth side. Now, again, like I said earlier,
this is a per plan, per employer feature. Your plan
(19:11):
has to offer the ability to make an after tax contribution,
and it must offer the ability to then withdraw that contribution.
Those two things are prerequisites. You can find this information
in something called your summary plan document, which will be
some of that boring stuff you've probably never read inside
your four to oh one k's website that I'll tell you.
It's kind of the instruction manual for your plan. So
(19:32):
take advantage that opportunity to put away a big pile tax.
Speaker 1 (19:34):
Free good stuff. A lot of good options. Going back
to what we can control, definitely worth a look. Here's
the all Worth advice. A small change in the tax
code can cost you big later, so plan ahead now
while you still have control. Are you ready to retire
or just ready to stop working? Our career expert Julie
(19:55):
Bauki shares why your identity might be the biggest hurdle
in retirement. Coming up next, you're listening to Simply Money
presented by all Worth Financial on fifty five KRC, the
talk station. You're listening to Simply Money presented by all
Worth Financial on Bob Sponseller along with Brian James, and
(20:16):
we're joined today by our career expert Julie Bauki.
Speaker 2 (20:20):
Julie on the job.
Speaker 1 (20:21):
Julie, thank you for making time for us this morning,
and I know you've got an important topic to cover
with us today, and that's the topic of tying our
identity to our work, especially when we think about pulling
back or retiring.
Speaker 4 (20:38):
Yeah, you know, we give so much of our time
and energy and effort and resources to work that when
all of a sudden we decide one day it's time
to walk away, or somebody makes that decision for us.
The more closely you have identified with your work in
your life, the harder that exit's going to be. Contrary
(21:00):
to this vision that I'm just going to step away
and I will be stepping into this amazing future unless
you build your what's next, the transition from being a
VP of something something to no longer having that title
is incredibly painful, and I think we really really underestimate
(21:22):
how hard that is for people.
Speaker 3 (21:24):
Sally, would you say it's fair? Is it fair to
say that people put far more energy into building there?
What was meaning? I'm going to think about my career
and I really want to drive things? Then they do
in that what's next thing? And how do you get
people off of the notion that that's something that will
take care of itself?
Speaker 4 (21:42):
You know, when you if you look back so high performing,
high accomplishment people, people who accomplished a lot in their career,
they have most likely put an emphasis on that. When
you look at sort of the dinner plate of life,
let's call it. If work is your main course and
you've really crowded out any side dishes when that main
(22:03):
course goes away, yes, you have accomplished a lot. And
so a lot of times people who are they've accomplished
a lot. They have big titles, big jobs, big bank accounts.
It has been at the expense of other things on
that plate. And so instead of expecting everything the shift
to write itself after you retire, you have to start
(22:25):
thinking about now before you retire. I mean maybe even
when you're in your fifties, where are you putting your emphasis?
Are you putting it all on work? And then what
are you short? You know, what are you short changing? Family? Friends, health, hobbies, community,
the kind of stuff that you might say matters, but
your actions show otherwise. And so sometimes we get to
(22:48):
be high performing and wildly successful because that is where
we've put our emphasis. So the loss when we walk
away from that. And this is why a lot of
people who are high performing, they have a really hard
time walking away because they won't be senator so and
so they won't be you know, vice president of this
or vice president of that, and because that's been how
(23:09):
they've identified for so long. It's really really a big fall,
especially when you go back home and your partner's not
that happy to see you, or your health has really
suffered and your doctor's on you. And so the only
way to get around this is to start thinking about
it well before you retire. How am I prioritizing my
time and what do I need to start building now
(23:30):
so that when I retire into five seven years, whatever
it is, I have some other my non work bucket
is already starting to fill up. I can start to
imagine myself without that title, and it's still hard. It's
still hard to walk away from something that has been
so important to you for so long. But it's believe me,
(23:53):
it is much easier to walk away once you've started
filling that second bucket then to imagine life without your title,
your office, you know those sort of things. And we
all know that person who retired but still keeps coming
back into the office and walking around and talking to people.
It's because they haven't developed that next stage of life yet.
Speaker 1 (24:13):
Well, Julia, someone who's counseled, no doubt hundreds of people
through this transition, walk us through some of the healthy
ways to kind of soft land into retirement or semi
retirement instead of just going cold turkey. What do you
counsel people to do in terms of practical steps to
make this transition ahead of time?
Speaker 4 (24:34):
This is one of my favorite things. So we all
have a calendar of some sort, and I've done this
exercise myself. Walk ahead to some place on your calendar
where you have nothing on it yet, maybe it might
even be two years away, and look at that week
and say to yourself, all right, I'm imagining this is
my calendar when I'm retired, it is empty. I now
(24:54):
have full control of my week, every minute of it
to a big extent. How am I going to fill
it in? How am I going to fill it in?
How many times a week do I want to play golf?
Or how many times a week is there a community
thing I want to involve it in? Other words, start to
imagine yourself in that space and look at an empty
(25:15):
calendar without work pulling on you, and just imagine how
are you going to fill that time? Because the delight
of waking up, you know, at seven instead of six
and going online and reading the news, and that wears
off pretty quickly, even though it might sound like nirvana
right now. So you have to put yourself into the
(25:36):
future and say, how will when I have a week
stretching in front of me, how will I spend my time?
Is it going to be family, friends, community? Am I
going to start getting more serious fell out my health?
And then fill in the calendar is if you had
full control of it, what have you ignored in the
last twenty thirty years of working that you're really interested in?
Are you going to ramp up in a hobby? Are
(25:58):
you going to become better something? Are you going to
learn something, Are you going to get involved in something?
What are you going to do to make that next
phase of life as powerful and meaningful as your previous
ones were? Because we've offered the stories about, you know,
in the last several decades, people who retire and then
die soon after. It's because they went from having great
(26:20):
purpose complete loss of purpose. And that sounds really really
seductive when you're in the middle of a crappy day,
but it's not. It's not so great when you're in
the middle of it.
Speaker 3 (26:30):
Julie, I want to hear some war stories. So so
Bob and I as financial advisors, we of course have
our favorite, our favorite times where we help somebody with
a financial plan. Maybe they were scared to death and
we helped them put the puzzle pieces together and they
walked out, you know, pretty happy. Can you give us
an example, of course, without naming any names, of somebody
with that was just terrified until you put a plan
together and how does that? How does that work? What
was what's your most favorite story?
Speaker 4 (26:52):
Yeah, so it was a woman who had a great
job in marketing. I means just a great job and
she liked it. You know, she's kind of five out
of ten, but she had started a side business that
she was really passionate about. Was she was so afraid
to step away from what she saw as a dependable, logical,
(27:16):
common sense thing because she thought people would say, why
are you doing that? You're sixty two years old? You know,
why are you you know? Why? Why would you walk away?
You've got a great job, they love you. Why would
you walk away and try something new at sixty two
years old? They looked at her like she was crazy.
And we were able to help her figure out what
was most important to her, to take almost a polaroid
(27:36):
a snapshot, what's the most important to you now? And
why are you listening to anybody else except what you want?
And what's most important to you? And once she was
able to kind of shut out the noise of other
people giving her the shoulds and are you crazy, she
was then able to get really clear about what was
most important to her for the next five to seven
(27:57):
years or as long as she wanted to work. And
it was clearly in building this side business that already
had signs of being really successful. She took the leap
because she'd said, Okay, I've got it's now or never,
and of course you know we're all looking at her
like you're nuts. You've got to do this, And just
checked in with her recently and she is incredibly happy.
She looks ten years younger, and she's just as successful
(28:20):
in the side hustle as she was as she was
in her original job. And that's the same with people
who have a passion for animals or community. Once they're
able to put more time and resources into that, you
can see them absolutely come alive. We've had clients move
from for profit, from a high level position in a
for profit to a high level position a nonprofit where
(28:44):
they are instead of focusing on, you know, how many
widgets they fell, they're focusing on how many lives they impact,
and to them that's meaningful. So you have to figure
out what your priorities and values are for the next
phase of your life. Once she can making that jump
is a lot easier.
Speaker 1 (29:03):
All right, We got to leave it there for today, Julie,
but thank you as always for all the great advice
you provide to us.
Speaker 2 (29:08):
And our listeners.
Speaker 1 (29:09):
You're listening to Simply Money presented by all Worth Financial
on fifty five KRC, the talk station you're listening to
Simply Money, presented by all Worth Financial. I'm Bob Sponseller
along with Brian James. Do you have a financial question
you'd like for us to answer. There's a red button
(29:30):
you can click while you're listening to the show right
there on the iHeart app. Simply record your question and
it will come straight to us. If you've ever looked
at your four oh one K investment choices and thought, wow,
is this all there is? You're not alone. The reality
is many plans limit your options. But there's a little
known feature called a brokerage window or self directed brokerage
(29:54):
account that can open up a whole new world of
investment options. Brian, let's get into that. Let's explain what
it is is and how we might use it.
Speaker 3 (30:01):
Bob A picturing people lying in a meadow, staring up
at the clouds and just wondering if this is really
all their four oh one K has to offer. Kind
of an existential crisis here. So but yeah, sometimes four
oh one k's it can be very limited. You've got
seven choices, or if you're if you're a federal employee,
you've got something called the thrift Savings plan, and you
got about four choices. But uh, that doesn't mean that's
all you'll ever see. A lot of four o one
(30:23):
k's have something called a brokerage window that's in addition
to the stuff they normally offer.
Speaker 2 (30:28):
Right.
Speaker 3 (30:28):
This is so a lot of times you'll see target
date funds. You'll see some large cap funds. You'll see
some bond funds where you can you know, kind of
build your own portfolio with in a limited play space,
where target date fund is usually an all in one
type of thing you can set and forget. Some of
these plans now allow a brokerage window, which means you
can have a brokerage account, opening up your investments to
just about anything under the sun. Not everything. It's never
(30:48):
going to be that simple, but this is a This
would look like a plan an account you'd have at
Schwab or Fidelity or whoever your provider is that you
can trade just like any other account, So you can
in that case, if you don't like the fun choices
that you have, then what you would do is you
would allocate a portion of your four oh one K
to go into this brokerage window. You got to jump
through some hoops to set it up, and there can
(31:10):
be extra fees out there tied to it, so you'll
have to kind of research see if it's possible. But
then you can buy your own exchange traded funds or
individual stocks, sector funds, whatever float your boat. But the
problem is most people don't even know this exists. It's
out there, but fewer than three percent of participants actually
even take advantage of it.
Speaker 1 (31:29):
Yeah, let's get into why someone would want to do
something like this. You know, you've got folks, and I'll
just give you, you know, some of the experience I
have with clients interested, you know, in your thoughts as well, Brian.
You've got some folks self directed investors that are very
good at doing this. They have the time, the inclination
to study this, they love to do it, and they
(31:50):
know exactly what they want to invest in, and they
can take full advantage of that self directed brokerage account
and do a pretty good job, you know, diversify their
funds and allocate responsibly. There's other folks that want some
help with the four to one K and we've got
clients that, you know, Brian, and I know other advisors
get involved as well, where you can have an advisor
(32:10):
help put together a good diversified portfolio within one of
these self directed brokerage accounts.
Speaker 2 (32:17):
You know, it usually tends to work from one extreme
to the other.
Speaker 1 (32:20):
That way where I get a little concerned is if
you open up the wild West of people one they
have no knowledge, no time, no inclination you know, to
know what they're doing, and you open up this whole
new range of a self directed brokerage account, that can
be a huge recipe for disaster, extra risk, trying to
(32:41):
time the market, you know, playing, you know, putting your
hand in the cookie jar when it shouldn't be.
Speaker 2 (32:46):
In there in the first place. You never run into
any of those situations.
Speaker 3 (32:50):
Absolutely, And one of the as we did our research
for this particular story, one of the things we came
across was Fidelity, one of the largest four to one
K providers on the face of the earth. They say
the most common whole bob in a self directed account
is cash. That means somebody jumped through all the hoops
to get this thing set up and curd the fees,
and you know, maybe they were loaded for bear with
their plan or whatever, but then as soon as it
(33:11):
came time to pull the trigger and do something, they froze.
That is not growth, that's fear, and it's probably well
founded because it might it might have sounded like a
great option right up until it's time to realize that,
you know what, do I really know what I'm doing?
Do I really want to be doing this? But the
problem is that that money is not invested in your
old four O one K funds. It's literally sitting in
cash waiting for you to do something. Don't.
Speaker 1 (33:32):
Well, maybe these are the folks that thought they'd try
it out and thought they knew what they were doing,
and they had some bad experience they decided to bail
on all this stuff that they bought that didn't work out,
and they're like, well, I tried that, I'm just going
to go to cash and leave it there.
Speaker 2 (33:47):
And now you're paying high fees.
Speaker 1 (33:48):
To sitting cash and you're just moving backwards.
Speaker 2 (33:52):
Yeah, didn't mean to interrupt your train of thought there, Brian.
Speaker 3 (33:55):
No, not at all.
Speaker 2 (33:55):
But you're exactly right.
Speaker 3 (33:56):
There's a lot of risk here in the idea of procrastinating.
It can be great to get all this set up.
I'm excited, I'm going to roll with it, and then
when it comes time to pull the trigger, people will
then go you know what, I'll think about it this weekend,
and then all of a sudden it never happens in months,
if not years go by.
Speaker 2 (34:09):
Here's the all Worth advice.
Speaker 1 (34:11):
More options are only better if you have a smart strategy.
Hire a good fiduciary advisor who can help determine whether
this is something that really truly works for you. Coming
up next Brian's bottom Line, where he's going to provide
some great education on Medicare premiums. You're listening to Simply
Money presented by all Worth Financial on fifty five KRC
(34:32):
the talk station. You're listening to Simply Money presented by
all Worth Financial. I'm Bob Sponseller along with Brian James,
and it's time for Brian's bottom Line. Brian, I know
you're anxious to talk about Medicare premiums and how to
have a little control over what you're paying for Medicare.
Speaker 3 (34:54):
Bob, what makes for better radio than Medicare rules and regulations?
Am I right? Am? I?
Speaker 2 (34:59):
Right?
Speaker 3 (34:59):
Am I right? Okay, let's talk about Irma today, So Ierma,
We're not this is not your kindly aunt. Irma famous
for her sugar cookies and made everything with Crisco. This
is not what we're talking about. ERMA stands for income
related Monthly Adjustment Amount. This is a rule that went
into place in two thousand and three. It started affecting
people's Medicare situations in two thousand and seven, and the
(35:21):
whole point of it originally was to make sure that
higher income Medicare beneficiaries were contributing more toward the cost
of their Part B and Part D premiums. You know,
I frequently hear BOB from clients who will say, when
do you think we're gonna go on income based? When
are we going to go on needs basement needs based
in Medicare? So security, we're already doing it. There's already
rules in place that we just don't think of that way.
So the way this works, this surcharge applies to about
(35:42):
eight percent of Medicare and rullies, so not not all
that many people, but that number is growing as incomes
continue to go up. And IRMA brackets the way this
is calculated, are not indexed to inflation, so people will
get there more quickly as incomes rise. But these brackets
do not adjust for it. Hits both Part B and
Part D, so B is your medical insurance and D
is your drug prescription coverage, and it'll kick in. If
(36:05):
you're single, it's gonna kick in about one hundred and
thirty three thousand dollars worth of income. One hundred and
six to one hundred and thirty three is the first
place where where we see a little bump in that premium.
Everybody pays about one hundred and eighty five dollars a month.
If you are that single person making more than one
hundred and six, your Beticare premium is going to go
off to two hundred and fifty nine bucks. If you
are married filing jointly, then that kicks in at two twelve,
(36:28):
so basically twice as much. And the whole point is
the higher income goes, the higher the premium goes. It
is based off of your modified adjusted gross income. That's
another one of those fun flavors of income that the
IRS creates whenever they get bored. But it's looking at
the income, not from this year. Let's not keep this simple,
bob o, No, no, no no, We're gonna look at
your modified adjusted gross income from two years ago. So
(36:51):
that means people who are paying their medicare premiums now
in twenty twenty five, those are calculated based off of
their twenty twenty three income. So therefore, you know, people
who are making income. Things you're doing right now will
affect you in twenty twenty seven if that's when your
Medicare premiums are going to kick in. So these are
things that we get questions on them all the time
because obviously it does affect you know, people's cash flow.
Speaker 1 (37:13):
So the good news here, Brian is there's things you
can do about it. And this goes back to what
we talk about all the time, and this is having
multiple buckets of money from which you can draw income,
some taxable, some non taxable, so you know, giving people
the income they need every month, but do it smartly
so we can keep under that next bracket of IRMA
(37:37):
premium increase. And oftentimes people are shocked and pleasantly surprised
when you show them how to do an actual plan
to pull this off, right, Brian.
Speaker 3 (37:47):
Yeah, So there are steps you can take so roth
conversions in the shorter run will reduce your required minimum
distributions in the future our mds. Those are the things
that kick in in your early seventies when the IRS
forces you to start taking money out of your four
oh one K and paying taxes. You can also do
something called a qualified charitable distribution, which basically means I
take that money that is my RMD and I give
(38:07):
it to a charity of my choice that will lower
my future modified adjusted gross income. And there's other steps
you can take as well. Talk to your advisor.
Speaker 1 (38:15):
More reasons to do actual income planning. It could not
be more critical. Thanks for listening tonight. Tune in tomorrow
and we will talk about why ignoring this one thing
could lead to more portfolio growth. You've been listening to
Simply Money, presented by all Worth Financial on fifty five
KRC the Talk station
Tonight, how does your four to one K balance compare
to everyone else's? The new numbers are out and quite frankly,
we could care less. You're listening to Simply Money, presented
by all Worth Financial. I'm Bob Sponsller along with Brian James.
Tonight we're breaking down one of those headlines that always
gets clicks and Brian, this story seems to come out
(00:27):
now about.
Speaker 2 (00:28):
Every six weeks.
Speaker 1 (00:29):
How does your four to one K balance stack up
to the national average? And yes, just like clockwork, every
time this number comes out, it sets off a wave
of financial comparison.
Speaker 2 (00:40):
You know, are we doing enough? Are we behind? Are
we ahead? Or should we be panicking? Let's dig into
those numbers. Brian.
Speaker 3 (00:49):
Yeah, this is a common common question and I'm sure
Bob you hear it too, very frequently. When I'm sitting
down with a client reviewing a plan or building a plan,
brand new plan for a brand new client, They'll oh,
everybody wants to so how do we compare? How do
we look compared to everybody else? And the I'm not
really sure how to answer it, because, knowing what we
know about the state of society in America, if you
(01:09):
got anything then you're doing a lot better than the rest.
So the kind of people who have have solid four
oh one ks and they've saved a lot of money,
I mean, it's no comparison to you know, to the
to the rest of the world. So here's how the
numbers are coming out. Vanguard has put out their their
annual How America Saves Report, and the average four oh
one K balance is one hundred and forty seven thousand dollars.
(01:31):
But that's not particularly useful because that doesn't mean anything
because there's forty years. There's a forty year range in
the ages of people they're asking. So let's narrow that
down a little bit. If you're between thirty five and
forty four, then ninety seven thousand dollars is the average.
But that's that's you're at the very beginning. At that point,
you are, as they tell my clients all the time,
you are standing on the tee of a six hundred
(01:51):
yard golf hole, and there is very little question about
which club you're gonna pull out of the bag. You're
gonna pull out the fat one, You're gonna swing out
of your shoes. You're at the beginning. You're gonna be aggressive,
you're gonna ride the waves a little bit. Now we
can go down with Brian.
Speaker 1 (02:01):
If you're gonna used golf analogies with me, a six
hundred yard hole, it takes me two weeks to finish
that hole when you watch how I hit a golf ball.
Speaker 3 (02:09):
But go ahead, Oh no, that that's why we're on
the radio, not on video, and nobody ever actually sees
us play golf. We're better at analogies than the actual golf.
So let's look at another age range here. If you're
sixty five and older, according to Vanguard, it's two hundred
and eighty five thousand on average. If that's you, then
you're in a different situation. The data says your average,
but two hundred and eighty five thousand dollars, you know
(02:29):
that may or may not be enough to retire unless
you've got a pension in the mixed social security and
really no debt and you're planning on keeping a pretty
tight budget too.
Speaker 2 (02:40):
Yeah.
Speaker 1 (02:41):
Now let's go to the other end of the spectrum.
You got somebody and we talk to folks like this
all the time. They come in and they say, for example, hey,
I've got we've got.
Speaker 2 (02:49):
One point two million dollars saved. We're rich. We're good.
Speaker 1 (02:53):
You know, we're ahead of the game according to the averages.
But that's you know, we got to remind people the
game we're playing here is not comparison game. The game
we're playing here is putting together a strategy based on
your specific goals. And once you hit that level, you
know where you got some money in there. You got
to get out of that comparison game and start looking
(03:14):
at income planning, things like tax strategies, longevity risk, and
actually look at what you're planning to spend in retirement.
Because I continue to bang the table on this one.
I'm always shocked at the number of people that come
into our office to start to do retirement planning and
they have no idea what they spend every month because
(03:35):
they're just taking whatever their current paycheck is, you know,
net of all the tax withholdings and deductions and everything else,
and that's what they spend. And for folks that have
a high income while they're working, that can also be
a false sense of security just assuming that that's just
going to continue, you know, forever, and some people are
(03:55):
surprised when they look at, well, you don't have enough
money to replace the pay check if you really do
expect to keep, say, spending at the rate you're spending
right now, Yeah, I think what you're.
Speaker 3 (04:07):
Saying there, And this is this is where people should
be thinking. Right. We all like to compare our piles.
How is my pile of money compared to everybody else's
pile of money? Do I have a bigger pile? That's
not what it's about, though, It's about the spending. So,
you know, let's look at these two folks we just
discussed with the one point two million dollars at age
sixty five versus the two hundred and eighty five thousand.
If the individual or the family with the two hundred
(04:28):
and eighty five thousand in four to one k iras,
if they have a couple social Security checks totaling you know,
four thousand dollars and they spend three, those folks are fine.
They're going to be okay with really without much question.
That means the two eighty five gets to continue to
grow and it'll pay off the lump some stuff, the vacations,
buying a carving now and then that kind of thing. Now,
let's look at that person with one point two million.
If they spend like they have ten million, they're not
(04:51):
going to be okay. So it's it's all about the math.
It's not about the pile. It's about the trickle that
needs to come out of it. You can drain it
to nothing, or you can allow it to continue to
grow while still paying your bills. That's where the spending
comes in that Bible's referencing.
Speaker 2 (05:04):
Well.
Speaker 1 (05:04):
Another thing to point out from this Vanguard study that
I think is useful and is very interesting at least
to me, is participation rates. Vanguard says that only six
and ten eligible workers are even participating in their four
to one K and Brian, I've got to assume that
most of these four to one K plans have matching
provisions in them. So six and ten people not only
(05:26):
are they not putting any of their own money away,
but you know, if the average match is say fifty
cents on the dollar up to five or six percent
of pay, they're literally leaving dollars on the table, free money,
fifty percent return on your money because they aren't even
signed up. They're not participating. So you know, these articles
can get a little unsettling because they can cause a
(05:48):
series of different emotions. You know, if you're behind and
or haven't got started, or if you're one of those
people that aren't participating, maybe you just throw your hands
up and say, I just give up.
Speaker 2 (05:58):
I'll never get there. I'll never get there.
Speaker 1 (06:00):
Or maybe you think you need to save a whole
lot more when maybe you don't have to. And and
that's kind of the point we're driving home here. Don't
compare yourself to other people. Put an actual plan together
based on your individual goals and objectives, and see how
that is stacking up. You're listening to Simply Money, presented
by all Worth Financial. I'm Bob sponsoring along with Brian James.
(06:23):
All right, Brian, we talked about kind of this data
to kind of ignore and brush to the side. What
are the things that we should be asking when we
do responsible financial planning as it relates to our four
one K plan and everything else we're putting away for retirement.
Speaker 3 (06:38):
Yeah, this was This was what I was hinting at
before I kind of stole the lead here. But rather
than asking how big is my pile and how big
is it compared to other people what's the average pile
of money? Ask the question do I know how much
income I'll need in retirement, you know, that's all. That's
almost a that's a prerequisite to everything, no matter how
much money you have. People who have millions and bazillions
of dollars, you know, generally speaking, don't have any idea
(07:00):
what they spend because they've never been forced to. The more,
there's an inverse relationship between the size of your pile
of money and how much knowledge you have about your
monthly budget. If you've got enough money where you don't
really have to pay attention to how their bills are
getting paid, You just know they are getting paid. That's
a good, happy situation, But it does mean that you
can't really anticipate, you know, what about healthcare costs? What
about taxes? Inflation? And also have I stress tested my
(07:22):
retirement for a down market? All of that starts with
what do I need this pile of money in these
streams of income?
Speaker 2 (07:29):
Right?
Speaker 3 (07:29):
All benefits are All financial assets are either piles of
money for owen kiras, investments, et cetera, or streams of
income social security, pension, part time work, whatever you're going
to do. But none of that matters. None of those
data points matter. If I have no idea what target
I'm shooting at? Meaning, do I have any idea what
it costs my household to be my household for a month.
Speaker 1 (07:49):
Well, and just to piggyback on those points, what we're
talking about here is getting ahead of the game here,
you know, years ahead of when you plan to retire
and actually start to craft in income strategy. And the
folks that are the most successful from a tax standpoint
and a retirement income standpoint, they've got different piles of
(08:09):
money and they've had somebody develop a strategy for them
where they can take those streams of income, as you say,
from different sources like rowth iras, some from your four
oh one K, some from social security, some from a
pension if you have it, and then some from just
a good old after tax brokerage fund. You know, there's
different levers we can pull to manage your tax situation
(08:33):
efficients efficiently, and that's how we help people, you know,
cross the finish line successfully.
Speaker 3 (08:39):
Yeah, and another point out of this article, remember this
is coming from Vanguard's four oh one K division. Fidelity
does this too from time to time because they're two
of the largest four to one K providers out there.
They know exactly what millions upon millions of people have
in their four oh one k is because they hold
those accounts, but they have no idea what people have outside,
So they're not really talking about someone's a full situation.
(09:01):
They're simply talking about the individual four oh one K
balances they see for the participants, the employee participants that
for whom they accustody those assets. Those individual people could
have roth I arrays in the mix. They could have
other brokerage accounts, other old four oh one k's that
have nothing to do with Fidelity and Vanguard. So let's
not pay too much attention to these, to these kind
of sort of where we cherry picked one data point.
Speaker 1 (09:23):
Or they could have rich parents and grandparents and get
wealthy the old fashioned way inherit it right.
Speaker 3 (09:29):
Brian Never, Yeah, that's true. How often has it happen
where you've have somebody walks in the door, Bob, and
you think you have you'd have a stab at what
their situation is, and you find out that some business
was sold or they inherited something from a long lost
uncle or aunt, and it's a whole different story instantaneously.
There is so much money in this country flying around
all different directions. It's very, very unpredictable.
Speaker 1 (09:50):
The point we're trying to make here is it really
does not matter at all what some national average study says.
You're not retiring based on what your neighbor saved or
what you think people in your neighborhood have. You're retiring
based on your own expenses, your own lifestyle, and your
own life goals. Here's the all Worth advice. Don't compare
(10:11):
your four oh one k to a national average. Compare
it to the future you want for yourself and build
that plan. Build your plan around your desired future. Coming
up next, a change is coming for some retirement accounts
and it could mean losing a major tax break. Will
tell you what that's all about and how to plan
(10:31):
around it. Next, you're listening to Simply Money presented by
all Worth Financial on fifty five KRC the talk station.
You're listening to Simply Money presented by all Worth Financial
on Bob Sponseller along with Brian James.
Speaker 2 (10:49):
If you can't listen to.
Speaker 1 (10:49):
Simply Money live on the radio every night, subscribe to
get our daily podcast. And if you think your friends
could use some financial advice, tell them about it.
Speaker 2 (10:59):
Tell them about the podcast.
Speaker 1 (11:01):
As well, just search simply money on the iHeart app
or wherever you find your podcasts.
Speaker 2 (11:07):
Straight ahead at six.
Speaker 1 (11:08):
Forty three, a hidden door to more investing freedom if
you know where to look, all right, If you're fifty
years old or older and you're playing catch up on
your four to one K contributions, you're probably adding an extra,
say seventy five hundred dollars a year. But starting in
twenty twenty six and twenty twenty six is just around
(11:29):
the corner, Brian. If you're a high earner, that money
cannot go into the pre tax bucket anymore. The IRS
wants it going straight into the Wroth options. So that
changes the math, and it might mean some smart moves
need to be made now.
Speaker 3 (11:45):
Yep. This is one of those little elements of the
Secure Act, right so I don't even remember what secure
stands for anymore, but this is our second version of
the Secure Act. And they was originally, you know, the
kind of pitched as both of these were, let's put
people in a better place for retirement, and then here's
seventy two other little things. We're gonna sneak in there anyway,
just because we can't so currently as once you're over fifty,
(12:10):
you can currently put another seventy five hundred dollars in
the current limit is twenty two to five for everybody
under the sun, and then an extra seventy five hundred
for if you're over fifty, and the current rule is
all of that you that entire thirty thousand in that
example could go into the WROTH side, or it could
go into the pre tax traditional side. That is a
choice that you have based on your own situations. The
(12:32):
change that's coming in twenty twenty six. If you have more,
if you make more than one hundred and forty forty
five thousand dollars in wages, right, not total comp but
just wages, your four oh one k catch up contributions,
that extra seventy five hundred currently that has to go
into a WROTH four oh one k. So what this
means this is a sneaky way to make sure the
(12:52):
irs and the government gets the taxes that they need.
They're basically saying, yeah, you can still save this money,
but you're gonna have to pay taxes on it, meaning
these will be after tax contributions. That's what a roth is.
So that seventy five hundred dollars is still going to
be taxable as income. You'll see that come through and
you're withholding you no longer will have the choice currently
unless they change this, you won't have the choice for
that upfront tax deduction. And the folks who are in
(13:14):
this situation where they can afford to be putting in
that full that full catchup contribution, including the original contribution,
are usually the ones in the higher brackets anyway, So
the irs giveth and it taketh away.
Speaker 1 (13:28):
Yeah, and that's something that I think very few people
really know is coming down the pike, Brian. Most people
that come in and talk to us have no idea
that this change is coming. And to your point, we
do have a lot of high income clients that are
taking full advantage maxing out coming in twenty twenty six,
and it's something to be aware of. You're listening to
(13:50):
Simply Money presented by all Worth Financial Bob Sponsler along
with Brian James.
Speaker 2 (13:55):
All Right, Brian, what should we do about it?
Speaker 1 (13:56):
We've just defined the quote unquote problem in the change
that's coming down the road. What should we be doing
about it here in the next six months as we
navigate through the rest of twenty twenty five.
Speaker 3 (14:08):
Yeah, if we don't provide answers to these things, we're
really just griping on the radio, which doesn't helpful to anybody.
So what should you do now? If this is you,
if you feel like you're likely to face higher tax
rates in retirement, or if the Tax Cuts and Jobs
Act tax Act expire, those cuts expire, that's the one
from twenty seventeen, then potentially converting IRA money now to
(14:28):
ROTH could lock in today's tax rates. So this would
be my favorite situation where this comes up is for
people who have retired and perhaps they put themselves in
a position where they can spend down some you know,
kind of tax free assets in a sense. Right, So
they've built up some cash, maybe a couple hundred thousand dollars.
Often we see and frequently that comes from when people retire,
(14:51):
that is around the age they sometimes inherit things from
their parents, and so there could be a pile of
cash from that, and I'll frequently tell them, look, let's
just spend that down. Let's throw it in a high
yield savings acut out. We'll pick your bank, favorite bank,
I don't really care. Just get four or five percent
on it now and spend that down. That means you're
not generating any income at all, no social security. We
don't have to turn that spigot on yet, we're not
(15:11):
taking money out of our taxable iras or anything because
we've got plenty of money on the side. That means
we're in a zero bracket. That is not a reason
to spike the football. A zero bracket is a missed opportunity.
We should be filling up those brackets ten twenty two,
maybe even twenty four percent, depending your situation, and converting
even up to a couple hundred thousand dollars, maybe even
(15:31):
more based in your situation, convert that to roth at
lower brackets than you've seen in your entire working career.
Now that you are simply living off of savings, that
will help you. It's going to reduce your required minimum
distributions that are going to kick in at age seventy
three or seventy five, depending on when you were born,
way in the way ten years into the future, ten
fifteen years rather and it's also going to pass more
(15:53):
efficiently to your kids rather than leaving that traditional IRA
out there to continue to grow. And a lot of
people no Now, the one of the other changes that
came out of that act was anybody who passes after
twenty twenty, their errors of an IRA will have to
pay taxes and withdraw liquidate that IRA completely in ten years.
(16:13):
If that's a wroth, it still holds true. But the
fun thing about it is that they can also leave
a huge pile of money in there to continue to
grow that roth tax free after your death. So with
the proper amount of tax planning, there's a lot of
options out there for somebody to take advantage of what's available.
Speaker 1 (16:31):
All Right, you talked a little bit about folks that
are retired and the ROTH conversions and all that. Let's
pivot back to what folks that are really trying to
sock money away here pre retirement. You know, we just
talk about what they can't do in twenty twenty six
and what I'm leading into, Brian, and I know you've
got a lot of experience with this, this concept of
a megabackdoor wroth. A lot of people don't understand that
(16:53):
that even exists or how it works. Will you walk
us through how that works and maybe cite an actual
client exam because this is a powerful tool.
Speaker 3 (17:01):
Absolutely, this is one of my favorite things to talk about.
It's not available to everybody. It is a per employer,
per plan feature. But if your four to oh one
K allows after tax contributions, right there, there are three flavors,
believe it or not, there are three flavors of tax
taxation of dollars that flow into a four oh one K,
you've got your pre tax That's what's been there since
(17:23):
the beginning of retirement plans. Right if I put money away,
I save it, then I'm not going to pay I
get to deducted this year, not paying taxes on it.
That's always been there. In the past twenty years, we've
now had the ability to add ROTH contributions, which means
I don't get a deduction, I'm gonna pay taxes on
it this year that I'm contributing it, but it will
grow tax free forever. And that's what I tell all
of my client's kids. People are in their twenties thirties,
(17:44):
when you're just getting started, you're in a low bracket
rothroth rothroth roth all day long, build up that pile
of tax free money so that eventually you'll be in
a higher bracket when you have higher earnings, but you've
got a pile of tax free money that can grow
for forty forty five, maybe even fifty years for you.
So that's the second flavor. The third flavor is what
we're talking about, and it's after tax contributions sometimes called voluntary.
(18:07):
This is sort of a hybrid of both. So if
I put money in after tax, then I am paying
taxes on it, hence the name. But the difference is
the growth on an after tax contribution. It's different from WROTH.
The growth on an after tax contribution is taxable as
income when I pull it out, So it's sort of
a hybrid between pre tax and WROTH. But the trick
(18:28):
here is that you can make after tax contributions those
are not subject to that to that four h one
K limit that we're all accustomed to, somewhere in the
thirty thousand dollars range if you're over fifty less than that,
if you're under, you can put a way up to
sixty six to seventy three thousand dollars into your plan
by maxing out all of those different sources and anything
(18:49):
that is labeled as after tax, you can then convert
to WROTH, meaning if you've got the ability to say
goodbye to this cash flow. If you have the ability
to sock it away somewhere, you literally can put sixty
seven sixty two seventy thousand dollars away in your four
to one K and have a substantial pile of that
going onto the roth side. Now, again, like I said earlier,
this is a per plan, per employer feature. Your plan
(19:11):
has to offer the ability to make an after tax contribution,
and it must offer the ability to then withdraw that contribution.
Those two things are prerequisites. You can find this information
in something called your summary plan document, which will be
some of that boring stuff you've probably never read inside
your four to oh one k's website that I'll tell you.
It's kind of the instruction manual for your plan. So
(19:32):
take advantage that opportunity to put away a big pile tax.
Speaker 1 (19:34):
Free good stuff. A lot of good options. Going back
to what we can control, definitely worth a look. Here's
the all Worth advice. A small change in the tax
code can cost you big later, so plan ahead now
while you still have control. Are you ready to retire
or just ready to stop working? Our career expert Julie
(19:55):
Bauki shares why your identity might be the biggest hurdle
in retirement. Coming up next, you're listening to Simply Money
presented by all Worth Financial on fifty five KRC, the
talk station. You're listening to Simply Money presented by all
Worth Financial on Bob Sponseller along with Brian James, and
(20:16):
we're joined today by our career expert Julie Bauki.
Speaker 2 (20:20):
Julie on the job.
Speaker 1 (20:21):
Julie, thank you for making time for us this morning,
and I know you've got an important topic to cover
with us today, and that's the topic of tying our
identity to our work, especially when we think about pulling
back or retiring.
Speaker 4 (20:38):
Yeah, you know, we give so much of our time
and energy and effort and resources to work that when
all of a sudden we decide one day it's time
to walk away, or somebody makes that decision for us.
The more closely you have identified with your work in
your life, the harder that exit's going to be. Contrary
(21:00):
to this vision that I'm just going to step away
and I will be stepping into this amazing future unless
you build your what's next, the transition from being a
VP of something something to no longer having that title
is incredibly painful, and I think we really really underestimate
(21:22):
how hard that is for people.
Speaker 3 (21:24):
Sally, would you say it's fair? Is it fair to
say that people put far more energy into building there?
What was meaning? I'm going to think about my career
and I really want to drive things? Then they do
in that what's next thing? And how do you get
people off of the notion that that's something that will
take care of itself?
Speaker 4 (21:42):
You know, when you if you look back so high performing,
high accomplishment people, people who accomplished a lot in their career,
they have most likely put an emphasis on that. When
you look at sort of the dinner plate of life,
let's call it. If work is your main course and
you've really crowded out any side dishes when that main
(22:03):
course goes away, yes, you have accomplished a lot. And
so a lot of times people who are they've accomplished
a lot. They have big titles, big jobs, big bank accounts.
It has been at the expense of other things on
that plate. And so instead of expecting everything the shift
to write itself after you retire, you have to start
(22:25):
thinking about now before you retire. I mean maybe even
when you're in your fifties, where are you putting your emphasis?
Are you putting it all on work? And then what
are you short? You know, what are you short changing? Family? Friends, health, hobbies, community,
the kind of stuff that you might say matters, but
your actions show otherwise. And so sometimes we get to
(22:48):
be high performing and wildly successful because that is where
we've put our emphasis. So the loss when we walk
away from that. And this is why a lot of
people who are high performing, they have a really hard
time walking away because they won't be senator so and
so they won't be you know, vice president of this
or vice president of that, and because that's been how
(23:09):
they've identified for so long. It's really really a big fall,
especially when you go back home and your partner's not
that happy to see you, or your health has really
suffered and your doctor's on you. And so the only
way to get around this is to start thinking about
it well before you retire. How am I prioritizing my
time and what do I need to start building now
(23:30):
so that when I retire into five seven years, whatever
it is, I have some other my non work bucket
is already starting to fill up. I can start to
imagine myself without that title, and it's still hard. It's
still hard to walk away from something that has been
so important to you for so long. But it's believe me,
(23:53):
it is much easier to walk away once you've started
filling that second bucket then to imagine life without your title,
your office, you know those sort of things. And we
all know that person who retired but still keeps coming
back into the office and walking around and talking to people.
It's because they haven't developed that next stage of life yet.
Speaker 1 (24:13):
Well, Julia, someone who's counseled, no doubt hundreds of people
through this transition, walk us through some of the healthy
ways to kind of soft land into retirement or semi
retirement instead of just going cold turkey. What do you
counsel people to do in terms of practical steps to
make this transition ahead of time?
Speaker 4 (24:34):
This is one of my favorite things. So we all
have a calendar of some sort, and I've done this
exercise myself. Walk ahead to some place on your calendar
where you have nothing on it yet, maybe it might
even be two years away, and look at that week
and say to yourself, all right, I'm imagining this is
my calendar when I'm retired, it is empty. I now
(24:54):
have full control of my week, every minute of it
to a big extent. How am I going to fill
it in? How am I going to fill it in?
How many times a week do I want to play golf?
Or how many times a week is there a community
thing I want to involve it in? Other words, start to
imagine yourself in that space and look at an empty
(25:15):
calendar without work pulling on you, and just imagine how
are you going to fill that time? Because the delight
of waking up, you know, at seven instead of six
and going online and reading the news, and that wears
off pretty quickly, even though it might sound like nirvana
right now. So you have to put yourself into the
(25:36):
future and say, how will when I have a week
stretching in front of me, how will I spend my time?
Is it going to be family, friends, community? Am I
going to start getting more serious fell out my health?
And then fill in the calendar is if you had
full control of it, what have you ignored in the
last twenty thirty years of working that you're really interested in?
Are you going to ramp up in a hobby? Are
(25:58):
you going to become better something? Are you going to
learn something, Are you going to get involved in something?
What are you going to do to make that next
phase of life as powerful and meaningful as your previous
ones were? Because we've offered the stories about, you know,
in the last several decades, people who retire and then
die soon after. It's because they went from having great
(26:20):
purpose complete loss of purpose. And that sounds really really
seductive when you're in the middle of a crappy day,
but it's not. It's not so great when you're in
the middle of it.
Speaker 3 (26:30):
Julie, I want to hear some war stories. So so
Bob and I as financial advisors, we of course have
our favorite, our favorite times where we help somebody with
a financial plan. Maybe they were scared to death and
we helped them put the puzzle pieces together and they
walked out, you know, pretty happy. Can you give us
an example, of course, without naming any names, of somebody
with that was just terrified until you put a plan
together and how does that? How does that work? What
was what's your most favorite story?
Speaker 4 (26:52):
Yeah, so it was a woman who had a great
job in marketing. I means just a great job and
she liked it. You know, she's kind of five out
of ten, but she had started a side business that
she was really passionate about. Was she was so afraid
to step away from what she saw as a dependable, logical,
(27:16):
common sense thing because she thought people would say, why
are you doing that? You're sixty two years old? You know,
why are you you know? Why? Why would you walk away?
You've got a great job, they love you. Why would
you walk away and try something new at sixty two
years old? They looked at her like she was crazy.
And we were able to help her figure out what
was most important to her, to take almost a polaroid
(27:36):
a snapshot, what's the most important to you now? And
why are you listening to anybody else except what you want?
And what's most important to you? And once she was
able to kind of shut out the noise of other
people giving her the shoulds and are you crazy, she
was then able to get really clear about what was
most important to her for the next five to seven
(27:57):
years or as long as she wanted to work. And
it was clearly in building this side business that already
had signs of being really successful. She took the leap
because she'd said, Okay, I've got it's now or never,
and of course you know we're all looking at her
like you're nuts. You've got to do this, And just
checked in with her recently and she is incredibly happy.
She looks ten years younger, and she's just as successful
(28:20):
in the side hustle as she was as she was
in her original job. And that's the same with people
who have a passion for animals or community. Once they're
able to put more time and resources into that, you
can see them absolutely come alive. We've had clients move
from for profit, from a high level position in a
for profit to a high level position a nonprofit where
(28:44):
they are instead of focusing on, you know, how many
widgets they fell, they're focusing on how many lives they impact,
and to them that's meaningful. So you have to figure
out what your priorities and values are for the next
phase of your life. Once she can making that jump
is a lot easier.
Speaker 1 (29:03):
All right, We got to leave it there for today, Julie,
but thank you as always for all the great advice
you provide to us.
Speaker 2 (29:08):
And our listeners.
Speaker 1 (29:09):
You're listening to Simply Money presented by all Worth Financial
on fifty five KRC, the talk station you're listening to
Simply Money, presented by all Worth Financial. I'm Bob Sponseller
along with Brian James. Do you have a financial question
you'd like for us to answer. There's a red button
(29:30):
you can click while you're listening to the show right
there on the iHeart app. Simply record your question and
it will come straight to us. If you've ever looked
at your four oh one K investment choices and thought, wow,
is this all there is? You're not alone. The reality
is many plans limit your options. But there's a little
known feature called a brokerage window or self directed brokerage
(29:54):
account that can open up a whole new world of
investment options. Brian, let's get into that. Let's explain what
it is is and how we might use it.
Speaker 3 (30:01):
Bob A picturing people lying in a meadow, staring up
at the clouds and just wondering if this is really
all their four oh one K has to offer. Kind
of an existential crisis here. So but yeah, sometimes four
oh one k's it can be very limited. You've got
seven choices, or if you're if you're a federal employee,
you've got something called the thrift Savings plan, and you
got about four choices. But uh, that doesn't mean that's
all you'll ever see. A lot of four o one
(30:23):
k's have something called a brokerage window that's in addition
to the stuff they normally offer.
Speaker 2 (30:28):
Right.
Speaker 3 (30:28):
This is so a lot of times you'll see target
date funds. You'll see some large cap funds. You'll see
some bond funds where you can you know, kind of
build your own portfolio with in a limited play space,
where target date fund is usually an all in one
type of thing you can set and forget. Some of
these plans now allow a brokerage window, which means you
can have a brokerage account, opening up your investments to
just about anything under the sun. Not everything. It's never
(30:48):
going to be that simple, but this is a This
would look like a plan an account you'd have at
Schwab or Fidelity or whoever your provider is that you
can trade just like any other account, So you can
in that case, if you don't like the fun choices
that you have, then what you would do is you
would allocate a portion of your four oh one K
to go into this brokerage window. You got to jump
through some hoops to set it up, and there can
(31:10):
be extra fees out there tied to it, so you'll
have to kind of research see if it's possible. But
then you can buy your own exchange traded funds or
individual stocks, sector funds, whatever float your boat. But the
problem is most people don't even know this exists. It's
out there, but fewer than three percent of participants actually
even take advantage of it.
Speaker 1 (31:29):
Yeah, let's get into why someone would want to do
something like this. You know, you've got folks, and I'll
just give you, you know, some of the experience I
have with clients interested, you know, in your thoughts as well, Brian.
You've got some folks self directed investors that are very
good at doing this. They have the time, the inclination
to study this, they love to do it, and they
(31:50):
know exactly what they want to invest in, and they
can take full advantage of that self directed brokerage account
and do a pretty good job, you know, diversify their
funds and allocate responsibly. There's other folks that want some
help with the four to one K and we've got
clients that, you know, Brian, and I know other advisors
get involved as well, where you can have an advisor
(32:10):
help put together a good diversified portfolio within one of
these self directed brokerage accounts.
Speaker 2 (32:17):
You know, it usually tends to work from one extreme
to the other.
Speaker 1 (32:20):
That way where I get a little concerned is if
you open up the wild West of people one they
have no knowledge, no time, no inclination you know, to
know what they're doing, and you open up this whole
new range of a self directed brokerage account, that can
be a huge recipe for disaster, extra risk, trying to
(32:41):
time the market, you know, playing, you know, putting your
hand in the cookie jar when it shouldn't be.
Speaker 2 (32:46):
In there in the first place. You never run into
any of those situations.
Speaker 3 (32:50):
Absolutely, And one of the as we did our research
for this particular story, one of the things we came
across was Fidelity, one of the largest four to one
K providers on the face of the earth. They say
the most common whole bob in a self directed account
is cash. That means somebody jumped through all the hoops
to get this thing set up and curd the fees,
and you know, maybe they were loaded for bear with
their plan or whatever, but then as soon as it
(33:11):
came time to pull the trigger and do something, they froze.
That is not growth, that's fear, and it's probably well
founded because it might it might have sounded like a
great option right up until it's time to realize that,
you know what, do I really know what I'm doing?
Do I really want to be doing this? But the
problem is that that money is not invested in your
old four O one K funds. It's literally sitting in
cash waiting for you to do something. Don't.
Speaker 1 (33:32):
Well, maybe these are the folks that thought they'd try
it out and thought they knew what they were doing,
and they had some bad experience they decided to bail
on all this stuff that they bought that didn't work out,
and they're like, well, I tried that, I'm just going
to go to cash and leave it there.
Speaker 2 (33:47):
And now you're paying high fees.
Speaker 1 (33:48):
To sitting cash and you're just moving backwards.
Speaker 2 (33:52):
Yeah, didn't mean to interrupt your train of thought there, Brian.
Speaker 3 (33:55):
No, not at all.
Speaker 2 (33:55):
But you're exactly right.
Speaker 3 (33:56):
There's a lot of risk here in the idea of procrastinating.
It can be great to get all this set up.
I'm excited, I'm going to roll with it, and then
when it comes time to pull the trigger, people will
then go you know what, I'll think about it this weekend,
and then all of a sudden it never happens in months,
if not years go by.
Speaker 2 (34:09):
Here's the all Worth advice.
Speaker 1 (34:11):
More options are only better if you have a smart strategy.
Hire a good fiduciary advisor who can help determine whether
this is something that really truly works for you. Coming
up next Brian's bottom Line, where he's going to provide
some great education on Medicare premiums. You're listening to Simply
Money presented by all Worth Financial on fifty five KRC
(34:32):
the talk station. You're listening to Simply Money presented by
all Worth Financial. I'm Bob Sponseller along with Brian James,
and it's time for Brian's bottom Line. Brian, I know
you're anxious to talk about Medicare premiums and how to
have a little control over what you're paying for Medicare.
Speaker 3 (34:54):
Bob, what makes for better radio than Medicare rules and regulations?
Am I right? Am? I?
Speaker 2 (34:59):
Right?
Speaker 3 (34:59):
Am I right? Okay, let's talk about Irma today, So Ierma,
We're not this is not your kindly aunt. Irma famous
for her sugar cookies and made everything with Crisco. This
is not what we're talking about. ERMA stands for income
related Monthly Adjustment Amount. This is a rule that went
into place in two thousand and three. It started affecting
people's Medicare situations in two thousand and seven, and the
(35:21):
whole point of it originally was to make sure that
higher income Medicare beneficiaries were contributing more toward the cost
of their Part B and Part D premiums. You know,
I frequently hear BOB from clients who will say, when
do you think we're gonna go on income based? When
are we going to go on needs basement needs based
in Medicare? So security, we're already doing it. There's already
rules in place that we just don't think of that way.
So the way this works, this surcharge applies to about
(35:42):
eight percent of Medicare and rullies, so not not all
that many people, but that number is growing as incomes
continue to go up. And IRMA brackets the way this
is calculated, are not indexed to inflation, so people will
get there more quickly as incomes rise. But these brackets
do not adjust for it. Hits both Part B and
Part D, so B is your medical insurance and D
is your drug prescription coverage, and it'll kick in. If
(36:05):
you're single, it's gonna kick in about one hundred and
thirty three thousand dollars worth of income. One hundred and
six to one hundred and thirty three is the first
place where where we see a little bump in that premium.
Everybody pays about one hundred and eighty five dollars a month.
If you are that single person making more than one
hundred and six, your Beticare premium is going to go
off to two hundred and fifty nine bucks. If you
are married filing jointly, then that kicks in at two twelve,
(36:28):
so basically twice as much. And the whole point is
the higher income goes, the higher the premium goes. It
is based off of your modified adjusted gross income. That's
another one of those fun flavors of income that the
IRS creates whenever they get bored. But it's looking at
the income, not from this year. Let's not keep this simple,
bob o, No, no, no no, We're gonna look at
your modified adjusted gross income from two years ago. So
(36:51):
that means people who are paying their medicare premiums now
in twenty twenty five, those are calculated based off of
their twenty twenty three income. So therefore, you know, people
who are making income. Things you're doing right now will
affect you in twenty twenty seven if that's when your
Medicare premiums are going to kick in. So these are
things that we get questions on them all the time
because obviously it does affect you know, people's cash flow.
Speaker 1 (37:13):
So the good news here, Brian is there's things you
can do about it. And this goes back to what
we talk about all the time, and this is having
multiple buckets of money from which you can draw income,
some taxable, some non taxable, so you know, giving people
the income they need every month, but do it smartly
so we can keep under that next bracket of IRMA
(37:37):
premium increase. And oftentimes people are shocked and pleasantly surprised
when you show them how to do an actual plan
to pull this off, right, Brian.
Speaker 3 (37:47):
Yeah, So there are steps you can take so roth
conversions in the shorter run will reduce your required minimum
distributions in the future our mds. Those are the things
that kick in in your early seventies when the IRS
forces you to start taking money out of your four
oh one K and paying taxes. You can also do
something called a qualified charitable distribution, which basically means I
take that money that is my RMD and I give
(38:07):
it to a charity of my choice that will lower
my future modified adjusted gross income. And there's other steps
you can take as well. Talk to your advisor.
Speaker 1 (38:15):
More reasons to do actual income planning. It could not
be more critical. Thanks for listening tonight. Tune in tomorrow
and we will talk about why ignoring this one thing
could lead to more portfolio growth. You've been listening to
Simply Money, presented by all Worth Financial on fifty five
KRC the Talk station
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If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!