Latest / Money In Motion with Klaas Financial / Safe Withdrawal Rates

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Safe Withdrawal Rates · Money In Motion with Klaas Financial

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Speaker 1: And our phone lines they are open to you if
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Speaker 1: you've got a question for our retirement planning professionals from
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Speaker 1: Class Financial. I got whose pickphone gives call six O
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Speaker 1: eight three two one thirteen ten. That's six SO eight
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Speaker 1: three two one thirteen ten. Love to have you join
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Speaker 1: us this week. And of course, speaking of being joined,
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Speaker 1: we are joined by are retirement planning professionals CJ. Closs
0:19
Speaker 1: and Eric Schwartz of course coming to us from Class Financial.
0:22
Speaker 1: Their website class financial dot com. That's Class k l
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Speaker 1: It will be complementary to you again their number six
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Speaker 1: oh eight four four two five six three seven And
0:52
Speaker 1: as mentioned, joining us this morning our CJ. Closs and
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Speaker 1: Eric Schwartz.
0:55
Speaker 2: CJ. How you doing this morning?
0:57
Speaker 3: Good morning, Seawan, I'm doing great.
0:59
Speaker 2: How are you? I'm doing really good? Good to hear
1:01
Speaker 2: from you and Eric. How have you been.
1:03
Speaker 4: I've been great, Sean. I'm excited for our topic today.
1:06
Speaker 1: It's going to be a good one, a sustainable withdrawal rate,
1:09
Speaker 1: which I feel like and I know we'll get into
1:11
Speaker 1: this with you guys, but that's probably probably the biggest,
1:15
Speaker 1: biggest thing that folks wonder about, and we'll get some
1:18
Speaker 1: answers and we'll walk through it with our friends from
1:20
Speaker 1: Class Financial this morning. Don't forget if you've got questions,
1:23
Speaker 1: we've got an opportunity for you to get on the
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Speaker 1: air right now. It's six eight three two one thirteen ten.
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Speaker 1: That's six'h eight three two one thirteen ten. One of
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Speaker 1: the really cool features as well of the program is
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Speaker 1: answer come up during the program, so it's definitely beneficial
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Speaker 1: to pay close attention to the show.
1:50
Speaker 2: And before we get.
1:51
Speaker 1: Rolling on this week's topic in this week's conversation, let's
1:53
Speaker 1: actually look back at last week's program and get the
1:56
Speaker 1: class quiz question the week and answer there as well.
2:00
Speaker 4: Yeah, so thank you to everyone for listening as usual,
2:03
Speaker 4: and congratulations to a winner from last week was Bart,
2:06
Speaker 4: and Bart knew the answer to the question, which was
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Speaker 4: true or false Entering retirement with the least amount of
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Speaker 4: debt will give you the most freedom. The answer to
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Speaker 4: that is of course true.
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Speaker 1: Excellent that I love the name too, So congratulations to Bart.
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Speaker 1: a twenty five dollars gift cart to Capella's this week.
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Speaker 1: Just pay close attention. We'll tell you a little bit
2:29
Speaker 1: later on all the details about winning with the class
2:32
Speaker 1: Quiz s Clasch week. So, as mentioned, this week're going
2:34
Speaker 1: to be digging into a pretty darn big topic that
2:36
Speaker 1: is planning for sustainable with a sustainable withdrawal rate from
2:40
Speaker 1: your investment in retirement. And I know people are retiring
2:43
Speaker 1: earlier and we're living longer, so this seems like something
2:46
Speaker 1: you really need to think about, right, Yeah, But I'm just.
2:50
Speaker 3: Trying to figure out if everybody knows why you love
2:52
Speaker 3: the name of Bart, that's good cool for those who
2:55
Speaker 3: don't know. Sean loves the Simpsons. So yes, anyway, okay obsessed, Yes,
3:01
Speaker 3: thanks thanks for calling in virub.
3:03
Speaker 2: We appreciate it.
3:05
Speaker 3: Okay, yes, so so yes, we're talking about sustainable withdrawal
3:09
Speaker 3: rates or distribution rates. So this gets into a topic
3:12
Speaker 3: that I think when consumers think about retirement, one of
3:16
Speaker 3: their questions becomes, hey, how much should I plan to
3:20
Speaker 3: draw out of my accounts without running the risk of
3:23
Speaker 3: running out of money? Said another way, the number one
3:26
Speaker 3: fear of retirees is running out of money before they
3:29
Speaker 3: run out of life. And so a big part of
3:31
Speaker 3: our job is to move towards this topic now, believe
3:35
Speaker 3: it or not, As you can imagine, their academics are
3:38
Speaker 3: all over this topic in terms of research and analytics,
3:42
Speaker 3: and believe it or not, there's a lot of rules
3:45
Speaker 3: of thumb that the industry abides by that we would
3:49
Speaker 3: say are a great starting spot, but not a great
3:52
Speaker 3: ending spot. We'll get into that a little bit more
3:54
Speaker 3: as we move forward. But cash flow is critical when
3:58
Speaker 3: you enter retirement. When retirees think about risk, again, that
4:02
Speaker 3: number one fear is running out of money. So there
4:04
Speaker 3: are three key factors that we think impact retirement planning,
4:09
Speaker 3: one being the need for real inflation adjusted cash flow.
4:15
Speaker 3: Number two the risk of needing to sell investments during
4:18
Speaker 3: a downturn, and then number three the possibility of decades
4:22
Speaker 3: of lower than average market returns. These are key factors
4:26
Speaker 3: that can impact your retirement planning around these sustainable withdrawalrates.
4:30
Speaker 3: So managing your withdrawal rate to make sure your money
4:34
Speaker 3: lasts throughout retirement plays an essential role in your overall
4:38
Speaker 3: retirement strategy.
4:42
Speaker 2: Talking this morning with CJ.
4:43
Speaker 1: Closs and of course Eric Schwartz, our retirement planning professionals
4:46
Speaker 1: from Class Financial. Their website Cossfinancial dot com. That's Coss
4:49
Speaker 1: k l Aasfinancial dot com. A great website and great
4:53
Speaker 1: resource to learn more about about Coss Financial and of
4:57
Speaker 1: course learn more about the upper divisions the team, and
5:01
Speaker 1: of course line up for that weekly Market Pulse newsletter.
5:04
Speaker 1: So what exactly, CJ, then, would be excuse me, pardon me, Eric,
5:08
Speaker 1: what exactly would be considered a safe withdrawal rate?
5:12
Speaker 4: It's a good question. That's a million dollar question, Sean.
5:15
Speaker 4: It's it's what we spend a lot of our time
5:16
Speaker 4: talking to folks about and first of all, just thinking
5:19
Speaker 4: about a withdrawal rate. It's it's often expressed as a percentage,
5:23
Speaker 4: and like CJ said, there's a lot of rules that
5:26
Speaker 4: I'm out there. I'm sure a lot of people have
5:28
Speaker 4: heard the four percent rule. You can draw out four
5:30
Speaker 4: percent and be safe. That's a good starting point, not
5:35
Speaker 4: not exactly where, not exactly something that works for everybody.
5:39
Speaker 4: But the withdrawal rate or a safe withdrawal rate, is
5:43
Speaker 4: one that strikes the balance between, you know, drawing money
5:46
Speaker 4: out and enjoying retirement now, but also ensuring that you
5:49
Speaker 4: don't run out of money, which, as CJ said, is
5:52
Speaker 4: one of the biggest concerns we hear from retirees. And
5:55
Speaker 4: really it's not just about what you need to live.
5:58
Speaker 4: It also depends on other sources you have, like Social
6:01
Speaker 4: Security pensions if you're working part time, and it also
6:05
Speaker 4: depends on your age, special expenses like healthcare before Medicare
6:09
Speaker 4: kicks in at sixty five, or even your debt load
6:13
Speaker 4: going into retirement, which is what we talked a lot
6:15
Speaker 4: about last week. All these things play a role. So
6:18
Speaker 4: the key is understanding how sustainable your withdrawal rate is,
6:22
Speaker 4: especially when you factor in inflation and other market conditions
6:26
Speaker 4: as well.
6:28
Speaker 1: Talking this morning with our retirement planning professionals from Class Financial, CJ.
6:32
Speaker 1: Closs and of course Eric Schwartz. I mentioned the website.
6:34
Speaker 1: I mentioned of course signing up for the weekly Market
6:36
Speaker 1: Pulse newsletter. I mentioned you a little bit about some
6:38
Speaker 1: of the features and some of the cool things, but
6:40
Speaker 1: of course it's got a great little snapshot of what's
6:42
Speaker 1: been going on in the marketplace. Also, it has a
6:45
Speaker 1: link to your most recent podcast. Again, just head on
6:48
Speaker 1: over to coassfinancial dot com that's coss k l Aasfinancial
6:52
Speaker 1: dot com for your opportunity to subscribe to the weekly
6:55
Speaker 1: Market Pulse newsletter and of course learn more about Class
6:57
Speaker 1: Financial all online.
6:59
Speaker 2: Great data.
6:59
Speaker 1: Set up that appointment six oh eight four four two
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Speaker 1: five six three seven. Don't forget that first appointment to
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Speaker 1: you at costs Financial. It will be complementary, no charge
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Speaker 1: at six oh eight four four two five six three seven.
7:10
Speaker 1: Talking this week about a sustainable withdrawal rate from your
7:14
Speaker 1: retirement investments, and so as we work through these these numbers,
7:19
Speaker 1: kind of a reasonable withdrawal rate, what's kind of that
7:21
Speaker 1: area that we're going to look to Eric to avoid
7:24
Speaker 1: running out of money?
7:26
Speaker 4: Yeah, and this is going to come back to our
7:28
Speaker 4: favorite answer here. It depends right. We love to say
7:31
Speaker 4: that and we joke about it, but it's true, you know,
7:34
Speaker 4: And this is why we think it's important that folks
7:36
Speaker 4: have professionals in their lives to help them plan for retirement.
7:40
Speaker 4: But your age, your financial situation, and your goals, one
7:44
Speaker 4: of which is whether or not you want to leave
7:46
Speaker 4: money behind after you're no longer here. All of these
7:49
Speaker 4: things factor in. So when we're thinking about, you know,
7:52
Speaker 4: what is a reasonable withdraw rate? I mentioned there's kind
7:55
Speaker 4: of those those rules of thumb. While you can draw
7:57
Speaker 4: out four percent, well, it's a good spot to start,
8:00
Speaker 4: but it also depends on a lot of things, right.
8:02
Speaker 4: It depends on how you're invested, right, So if you're
8:05
Speaker 4: more conservative, the expected return on your investment portfolio is
8:10
Speaker 4: not going to be as high, which which impacts how
8:12
Speaker 4: much you can draw out. And you know how much
8:15
Speaker 4: your portfolio can be expected to replace what you take out,
8:19
Speaker 4: your retirement timeline, your current age, And I think the
8:24
Speaker 4: other piece here is the other income sources you have,
8:28
Speaker 4: because the thing about your withdrawal rate is for a
8:30
Speaker 4: lot of our clients and a lot of folks out there,
8:33
Speaker 4: your withdraw rate isn't the same all through retirement. Okay,
8:37
Speaker 4: so you may have, as I mentioned earlier, you may
8:40
Speaker 4: have higher expenses earlier in retirement because you're not yet
8:43
Speaker 4: sixty five, you have to pay for higher medical expenses.
8:47
Speaker 4: You may not yet have started Social Security. So you know,
8:51
Speaker 4: it's not uncommon for folks to have a higher withdrawal
8:53
Speaker 4: rate in earlier in the earlier parts of retirement. That
8:57
Speaker 4: then reduces later on when they turn on their Social
9:00
Speaker 4: Security benefits and when they get onto Medicare and lower
9:06
Speaker 4: their healthcare costs. So for some people, you know, a
9:09
Speaker 4: three percent or a four percent withdraw rate might be sustainable.
9:13
Speaker 4: And then for other people, you know, they might be
9:14
Speaker 4: able to handle a little bit higher with drawrate, maybe
9:16
Speaker 4: if they retire later or or they have some other
9:20
Speaker 4: sources of income. But the aim is to stay ahead
9:22
Speaker 4: of inflation and means and be able to maintain the
9:26
Speaker 4: lifestyle you want. So just because the market returns ten
9:29
Speaker 4: percent in a year, doesn't mean you want to take
9:31
Speaker 4: out the full ten percent, because there will be years
9:33
Speaker 4: in the future where the market doesn't return ten percent
9:36
Speaker 4: or maybe has a negative return, and we need to
9:38
Speaker 4: account for that with the good years as well.
9:40
Speaker 2: That's really important to remember.
9:42
Speaker 1: I know I as you know, we've kind of look
9:43
Speaker 1: at where recid memory of how the market's been going,
9:46
Speaker 1: like oh yeah, no problems like yeah, but I know
9:49
Speaker 1: we've we've covered those topics in great depth as well
9:53
Speaker 1: in previous programs. You can always listen back at cossfinancial
9:56
Speaker 1: dot com. That's cost k l a a s Financial
9:59
Speaker 1: dot com talk this week with CJ and Eric about
10:02
Speaker 1: sustainable withdrawal rate from your retirement investments. And so as
10:08
Speaker 1: we work through some of these some of these areas
10:10
Speaker 1: of you know what that number is and what's reasonable
10:14
Speaker 1: those type of things, how much then CG have our
10:16
Speaker 1: pre retirement income should we then be planning on U
10:19
Speaker 1: when it comes to to being replaced in retirement?
10:23
Speaker 3: Well, I bet you can guess at the answer, Sean.
10:28
Speaker 2: Is it? It depends? It depends?
10:30
Speaker 3: Yeah, uh, you know, before we get to the replacement percentage,
10:34
Speaker 3: I just I want to really emphasize that section that
10:37
Speaker 3: Eric went through. You know, what is the rate? And
10:39
Speaker 3: everybody wants to know what's the rate or how much
10:42
Speaker 3: money should I have? And unfortunately, just like anything meaningful
10:48
Speaker 3: in life, there's subtlety to these answers. And so you know,
10:52
Speaker 3: we have a lot of tools actually in our organization,
10:55
Speaker 3: the things that create what are called like guardrail mathematic algorithms.
10:59
Speaker 2: Process.
11:00
Speaker 3: This is that we can follow to make sure that
11:02
Speaker 3: if markets hit what are called high standard deviation events
11:05
Speaker 3: or unlikely events like an eight, that we can make
11:08
Speaker 3: adjustments as necessary to make sure that people don't run
11:10
Speaker 3: out of money. But I will tell you I've seen
11:13
Speaker 3: people in the industry just abide by a rule of thumb.
11:17
Speaker 3: I'm saying, people who do like what we do, they go,
11:19
Speaker 3: I don't know four percent at all times, and I'm
11:22
Speaker 3: just scratching my head, going, whoa that? And it's not
11:26
Speaker 3: that I don't understand the rule of thumb and just
11:29
Speaker 3: keeping it simple. But I'll be frank, there's many of
11:32
Speaker 3: our clients that early on will be pulling ten percent
11:34
Speaker 3: and then maybe they dropped onto two and then they
11:36
Speaker 3: go back to up to eight.
11:38
Speaker 2: There's people who retire.
11:39
Speaker 3: Later on in life who they don't want to leave
11:40
Speaker 3: money to their children, so we have them at an
11:42
Speaker 3: eight or nine percent withdrawal. Right, And again, if you
11:46
Speaker 3: don't know the context of those comments, that could scare you.
11:49
Speaker 3: But when you build context around those comments, around those
11:53
Speaker 3: withdrawal rights, suddenly the plan comes to life. So if
11:57
Speaker 3: you are, if you are just abiding by rules of
11:59
Speaker 3: Thumb as it relates to withdrawal rates, I would say, warning, warning, warning.
12:04
Speaker 3: Rules of Thumb were never designed to be custom solutions. Okay,
12:10
Speaker 3: now to your question, what is the target replacement rate?
12:15
Speaker 3: So when we say this, everybody think of it this way.
12:17
Speaker 3: I'm working earning one hundred thousand dollars a year as
12:19
Speaker 3: a household, let's say myself and a spouse or myself alone,
12:23
Speaker 3: and then I transition into retirement. So how much of
12:26
Speaker 3: that income will I need to replace that gross salary
12:30
Speaker 3: that I had while I was working? How much of
12:31
Speaker 3: that income will I need to replace in order to
12:33
Speaker 3: live the same lifestyle? And as I said, it depends greatly.
12:38
Speaker 3: But let me just tell you one important factor. If
12:42
Speaker 3: your objective is to replace the same kind of lifestyle,
12:46
Speaker 3: and if everything else in your life is held constant,
12:50
Speaker 3: meaning expenses do not change at all, when you enter retirement,
12:55
Speaker 3: you will need less gross income in retirement than you
12:59
Speaker 3: did when you were working. Let me repeat that. If
13:03
Speaker 3: you hold everything else constant in the background, and you're
13:06
Speaker 3: working as a household earning one hundred thousand dollars a year,
13:08
Speaker 3: and then you transition into retirement with the exact same
13:12
Speaker 3: cost structure, you will need less gross income. And a
13:15
Speaker 3: lot of people scratch their head and go, what are
13:17
Speaker 3: you talking about? Well, a few things. Number one, you
13:20
Speaker 3: were probably saving some of that money into a four
13:23
Speaker 3: to one K plan while you were working. But even
13:26
Speaker 3: if you weren't doing that, you were paying something called
13:28
Speaker 3: FIKA taxes that you do not pay when you are
13:33
Speaker 3: when you are in retirement drawing off Social Security pensions
13:36
Speaker 3: or retirement accounts. So by definition, you will need less.
13:40
Speaker 3: The question is how much less, and that answer varies
13:44
Speaker 3: greatly person by person, especially if think of if you
13:47
Speaker 3: followed our advice and paid off a mortgage right before
13:49
Speaker 3: you retired. So listen, we have seen people need thirty
13:54
Speaker 3: percent of their pre retirement income. We have seen people
13:57
Speaker 3: need ninety percent of their pre retirement Now, with all
14:02
Speaker 3: of this rambling out of the way, according to a
14:04
Speaker 3: twenty twenty four study by Mass Mutual, the average actual
14:08
Speaker 3: retirement age in the United States is now closer to
14:11
Speaker 3: age sixty two. So the interesting part about that is
14:14
Speaker 3: at sixty two, how much do I need to replace?
14:18
Speaker 3: You don't know, because there could be interesting things that
14:20
Speaker 3: pop up in the background, which, like Eric mentioned this before,
14:23
Speaker 3: what if my company was covering health insurance. Now I'm
14:26
Speaker 3: sixty two, I'm not yet to Medicare at sixty five,
14:29
Speaker 3: and I've got this potentially expensive Affordable Care Act health insurance.
14:34
Speaker 3: So listen, if anybody gives you a gimmicky response that
14:37
Speaker 3: you need eighty percent of your pre retirement income, nobody
14:41
Speaker 3: knows without doing a detailed analysis of your financial situation.
14:45
Speaker 3: So even when you hear me talking about this, what
14:47
Speaker 3: I'm really trying to tell you is do the math.
14:51
Speaker 3: Sit down with an advisor, do the math to figure
14:53
Speaker 3: out what it is that you will need.
14:55
Speaker 1: Really important conversation, and it's a great conversation to have
14:58
Speaker 1: as well, and get those plans in. It's never too
15:00
Speaker 1: early to start that conversation. It's a great dat to
15:03
Speaker 1: call the folks at cost Financial there telephon number six
15:05
Speaker 1: oh eight four four two five six three seven. Don't
15:08
Speaker 1: forget that initial get to know you appointment at COSS Financial.
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Speaker 1: up phone game a call six oh eight four four
15:16
Speaker 1: two five six three seven. You can learn more online
15:19
Speaker 1: the website coss Financial dot com. That's Coss k LaaS
15:23
Speaker 1: Financial dot com. And again the telephon number six O
15:25
Speaker 1: eight four four two five six three seven. Well what
15:28
Speaker 1: happens when you turn seventy three? We'll get the details
15:31
Speaker 1: on that and much much more as Money in Motion
15:34
Speaker 1: with Coss Financial continues next right here on thirteen ten.
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Speaker 1: Wib A full lines are open at six oh eight
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Speaker 1: three two one thirteen ten. That's six oh eight three
15:42
Speaker 1: two one thirteen ten. If you have questions for our
15:45
Speaker 1: retirement planning professionals from Class Financial love to have you
15:48
Speaker 1: join us this morning again, telp number to get on
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Speaker 1: the air six oh eight three two one thirteen ten.
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Speaker 1: Telphon number for Coss Financial, So easy to remember, that's
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Speaker 1: six so eight four four two five six three seven.
15:58
Speaker 2: I get a lot of folks actually coming up to
16:00
Speaker 2: me and they say, pray boy here. I just hear that.
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Speaker 1: I hear that number in my head constantly. There's a
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Speaker 1: reason why we do it that way, because it's an
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Speaker 1: important number. Six eight four four two five six three
16:09
Speaker 1: seven for Claus Financial lo website Coloss Financial dot com.
16:12
Speaker 1: That's Coss k l a As Financial dot com. Talking
16:16
Speaker 1: this week with Eric Schwartz and CJ. Class talking about
16:20
Speaker 1: the sustainable withdrawal rate from your retirement investments and H
16:25
Speaker 1: and Eric, excuse me, CJ. As we as we were
16:27
Speaker 1: just talking that last segment about pre retirement income and
16:31
Speaker 1: replacing replacing that income in retirement the age seventy three
16:36
Speaker 1: and people are going seventy three. I don't know that
16:38
Speaker 1: we've touched on seven three yet. Uh, something does happen there?
16:42
Speaker 1: And there are rules about taking money out? What do
16:45
Speaker 1: folks need to know and how does that work?
16:47
Speaker 2: CJ.
16:49
Speaker 3: Yeah, you're talking about required minimum distributions known as r
16:52
Speaker 3: mds for short, and some people like to even confuse
16:55
Speaker 3: it beyond that, to call it mrd's minimum required distributions.
16:58
Speaker 3: It's all the same thing. It references the age at
17:02
Speaker 3: which you become required to start pulling out minimum distributions
17:08
Speaker 3: from your pre tax retirement accounts. Now, there can be
17:11
Speaker 3: an exception to this if you have an employer sponsor,
17:14
Speaker 3: if you're still working at a company where you have
17:17
Speaker 3: pre tax money, you can often defer pulling out that
17:21
Speaker 3: required distribution of that particular plan. But most people are
17:25
Speaker 3: retired by seventy three, right, So most people are retired
17:28
Speaker 3: they've got their money, whether it be in a four
17:30
Speaker 3: to one K and we'll call it an old non
17:32
Speaker 3: contributory four to one K four oh, through b or iras.
17:36
Speaker 3: And when you turn seventy three, you have to start
17:38
Speaker 3: pulling out these minimum distributions. Now, for those of you
17:41
Speaker 3: who are listening scratching your heads, going seventy three, I
17:45
Speaker 3: thought it was seventy and a half, and then I
17:48
Speaker 3: thought it was seventy two, and then I've also heard
17:51
Speaker 3: this number seventy five. So yeah, there's some information on
17:57
Speaker 3: that right now. So if you were born after nine
18:00
Speaker 3: teteen sixty, your RMD age will be seventy five. If
18:06
Speaker 3: you were before born before nineteen sixty, and you are
18:10
Speaker 3: not yet seventy three, then your RMD age will be
18:14
Speaker 3: seventy three. Now, some of you who are listening on
18:16
Speaker 3: the air right now, go no, no, no, no, no, I
18:18
Speaker 3: started drawing at seventy and a half or seventy two.
18:21
Speaker 3: That's true for you, it was a different age. But
18:23
Speaker 3: for people now who are turning seventy three, it's seventy three.
18:27
Speaker 3: And for anybody born after nineteen sixty, which Eric and
18:30
Speaker 3: I should be raising our hands right now. Our RMD
18:33
Speaker 3: age will be seventy five. Now rmds. What the heck
18:38
Speaker 3: are these things? Well, versings. First, you need to take
18:40
Speaker 3: your first required minimum distribution by April first of the
18:45
Speaker 3: year after you turn seventy three. This is known as
18:49
Speaker 3: your required beginning date or RBD. I just laugh at
18:55
Speaker 3: how complicated our industry makes us. Most of the time.
18:59
Speaker 3: You do not want to push off your first RMD
19:03
Speaker 3: to the following year, because every subsequent RMD must be
19:08
Speaker 3: pulled out by December thirty first. So if you're tracking
19:10
Speaker 3: with me, let's say I turned seventy three this year,
19:14
Speaker 3: my required beginning date is April first of twenty twenty
19:17
Speaker 3: six next year. But if I do that and I
19:20
Speaker 3: push off my first one to next year, then I
19:23
Speaker 3: also have to pull next year's by December thirty first,
19:26
Speaker 3: meaning I will have to double up on rmds in
19:29
Speaker 3: twenty twenty six and every year thereafter it has to
19:31
Speaker 3: be out by December thirty first. So listen. Under most circumstances,
19:35
Speaker 3: talk to your advisor, talk to your accountant. But under
19:37
Speaker 3: most circumstances, you're going to want to pull out that
19:39
Speaker 3: first RMD in the year in which you turn RMD age,
19:43
Speaker 3: which is typically seventy three.
19:46
Speaker 1: Talking this morning with CJ. Class and Eric Schwartz, our
19:48
Speaker 1: retirement planning professionals. They come to us from Claus Financial,
19:51
Speaker 1: the website claus financial dot com. That's Klaas Financial dot com.
19:56
Speaker 1: Tel Number six so eight four four two five six
19:58
Speaker 1: three seven that at first appointment at costs financial Like
20:01
Speaker 1: it's no conversation, it'll be complimentary to you. Again, they're
20:04
Speaker 1: number six O eight four four two five six three seven.
20:07
Speaker 1: So the big why of all of this, CJ is
20:09
Speaker 1: why does the IRS require us to do our mds?
20:13
Speaker 3: Yeah, great questions. So because it is weird, it's like
20:16
Speaker 3: what what what? What's happening? So I put in money
20:19
Speaker 3: pre tax, it grows tax deferred, and then like I
20:22
Speaker 3: get to retirement, they're forcing me to pull money out. Yes,
20:26
Speaker 3: so I don't want to get too deep into the weeds.
20:28
Speaker 3: But it actually makes a lot of sense behind the
20:30
Speaker 3: scenes if you understand this. And here's here's a simple concept.
20:34
Speaker 3: If money doesn't exit the we'll call it the the
20:38
Speaker 3: ecosystem of finance. So think of this as I earn
20:42
Speaker 3: a dollar, I pay income taxes, I use that dollar
20:45
Speaker 3: to go buy goods and services. I pay sales taxes.
20:48
Speaker 3: Those people pay a salary for the people that work
20:52
Speaker 3: at the place where I bought the goods and services.
20:54
Speaker 3: They pay income taxes they go buy something. My dollar
20:58
Speaker 3: is in circulation constantly, like all the time, and the
21:03
Speaker 3: federal government and state agencies and municipalities generate tax revenue
21:07
Speaker 3: off of that I don't know one hundred times in
21:09
Speaker 3: a year, like just a bunch. Well, if I remove
21:12
Speaker 3: that money from the in circulation and I set it
21:15
Speaker 3: into retirement accounts, well, imagine how much tax revenue is
21:20
Speaker 3: being lost by state and local governments, by municipalities, by
21:24
Speaker 3: federal governments. It's massive, And therefore the government has to
21:29
Speaker 3: in order to remain in business, I shouldn't say in business,
21:32
Speaker 3: in order to function, they have to figure out ways
21:35
Speaker 3: to not allow all that money to stay outside of
21:38
Speaker 3: the taxable circulation for too long. So that's why they say, hey,
21:42
Speaker 3: I don't care if you need the money or not.
21:43
Speaker 3: When you turn seventy three or at some age, we
21:46
Speaker 3: got to force you to start pulling out that money,
21:48
Speaker 3: because when you pull it out, it re enters general circulation,
21:51
Speaker 3: it starts getting taxed again. So that's the why. And
21:55
Speaker 3: then rmds are based on the balance of your retirement
21:59
Speaker 3: accounts at the end end of the year, or i
22:01
Speaker 3: should say at the end of the previous year, divided
22:05
Speaker 3: by your life expectancy from the IRS tables. So there's
22:10
Speaker 3: a table you can right now go to Google and
22:12
Speaker 3: just put in an RMD table. It'll pop up. You'll
22:15
Speaker 3: find some of the some of the recent tables used
22:17
Speaker 3: for this. But there's a life expectancy factor. So you
22:20
Speaker 3: take your December thirty first value of all of your
22:23
Speaker 3: pre tax retirement accounts, you divide it by that life
22:26
Speaker 3: expectancy table based upon your age, and then it gives
22:29
Speaker 3: you a number. That number ends up representing about three
22:32
Speaker 3: point six to three point seven percent of your pre
22:36
Speaker 3: tax amount has to come out in the first year
22:39
Speaker 3: you turn RMD age, and that percentage gets larger every
22:43
Speaker 3: single year you move forward, so effectively, what's happening is
22:47
Speaker 3: they're forcing you to pull more and more and more
22:51
Speaker 3: in percentage terms out of your pre tax retirement accounts
22:55
Speaker 3: every single year you move forward. Now, a couple of
22:58
Speaker 3: quick things here. Rmds do not apply to roth irays
23:02
Speaker 3: unless they're inherited, and the reason is because there's nothing
23:06
Speaker 3: for the irs to get out of forcing you to
23:08
Speaker 3: pull money out of a roth ira. Remember when money
23:10
Speaker 3: comes out of roth iras, assuming you're over fifty nine
23:13
Speaker 3: and a half, there's.
23:13
Speaker 2: No tax due.
23:15
Speaker 3: Therefore, there is no RMD on roth iras or wroth
23:20
Speaker 3: for ow and k's as of twenty twenty four. That's
23:22
Speaker 3: actually a new rule. There used to be rmds on those. Now.
23:26
Speaker 3: The key here is there is an RMD if you
23:28
Speaker 3: inherited the roth ira, but there's just not one if
23:32
Speaker 3: it was your own. And listen, if you don't need
23:35
Speaker 3: the money. Often people say this is highway robbery. I
23:38
Speaker 3: don't need the money and I'm pulling it out and
23:40
Speaker 3: I'm paying taxes. This is terrible. Well, there is a
23:44
Speaker 3: get out of jail free card, and the get out
23:47
Speaker 3: of jail free card is you can give all that money,
23:49
Speaker 3: all that RMD money directly to a charity. This is
23:53
Speaker 3: known as doing a qualified charitable distribution a QCD. And
23:57
Speaker 3: you can pull all of that money out give it
23:59
Speaker 3: directly to charities, and two things happens. It counts towards
24:02
Speaker 3: meeting your minimum distribution and you don't have to claim
24:06
Speaker 3: it as as well, you have to file the ten
24:10
Speaker 3: ninety nine but then just notify your accountant that it
24:12
Speaker 3: all went to charities and you don't you don't end
24:14
Speaker 3: up paying income taxes on that. So there is that
24:17
Speaker 3: get out of Joe free card. But you'll want to
24:20
Speaker 3: talk to your accountant to make sure you're doing this
24:22
Speaker 3: all the right way.
24:23
Speaker 2: It's a really neat feature.
24:24
Speaker 1: And I know we've talked in quite quite great depth
24:28
Speaker 1: on qcds and what a great powerful tool they are.
24:31
Speaker 1: And of course you can always listen back to this
24:34
Speaker 1: in previous shows podcasts. Of course, get caught up on
24:36
Speaker 1: qcds and other things all at Costs Financial dot com.
24:39
Speaker 1: That's cost k l a a s Financial dot com.
24:42
Speaker 1: They're a tell number six oh eight four four two
24:44
Speaker 1: five six three seven. No charge for that initial getsino
24:47
Speaker 1: you appointment deck cost Financial. It will be complimentary to
24:49
Speaker 1: you again, they're number six oh eight four four two
24:52
Speaker 1: five six three seven. We'll talk about the importance of savings.
24:55
Speaker 1: We'll also talk about a great question from Scott with
24:58
Speaker 1: the Money in Motion list the question corner. We will
25:01
Speaker 1: do all of that next as Money in Motion with
25:03
Speaker 1: Coss Financial continues right here on thirteen ten. WI b
25:07
Speaker 1: A talking with our retirement planning professionals CJ. Closs and
25:10
Speaker 1: Eric Schwartz. Of course they come to us from COSS Financial.
25:13
Speaker 1: Their website cossfinancial dot com. That's Coss k l a
25:16
Speaker 1: A S Financial dot com. And they're telephone numbers six
25:19
Speaker 1: so eight four four two five, six three seven. Talking
25:22
Speaker 1: about a sustainable withdrawal rate from your investments for retirement,
25:27
Speaker 1: and you know we've been talking about all these different investments.
25:30
Speaker 1: What about emergency savings. I'm going to guess that that's important, right, Yeah, you.
25:37
Speaker 4: Know, this is something that I often have clients questioned
25:39
Speaker 4: me about because we you know, we encourage them to
25:42
Speaker 4: still have liquidity and have an adequate emergency fund even
25:45
Speaker 4: when they're in retirement. And people will say to me, well, Eric,
25:48
Speaker 4: what does it matter. I'm I'm retired. I can access
25:50
Speaker 4: my retirement account if I need, if I need extra money,
25:53
Speaker 4: or something comes up. There's a couple of reasons why
25:56
Speaker 4: I would I would encourage people to still have an
26:00
Speaker 4: urgency fund. Number one, Oftentimes, if you need to take
26:03
Speaker 4: money from your retirement account, there are there are taxes
26:06
Speaker 4: due upon drawing money out, which is fine if it's
26:09
Speaker 4: all part of your you know, your annual income plan.
26:12
Speaker 4: But if it's additional income that you weren't planning on
26:14
Speaker 4: taking out, suddenly we're increasing our taxable income, maybe we're
26:18
Speaker 4: impacting our health insurance premiums. So it's just it's just
26:22
Speaker 4: good to have an easy fund to access that you
26:26
Speaker 4: don't have to worry about paying taxes on. And the
26:29
Speaker 4: other piece of it is as people move into retirement,
26:31
Speaker 4: there are plenty of changes. They're not going to work
26:34
Speaker 4: every day, they are, you know, trying to find new
26:37
Speaker 4: new routines, and there's just a lot of change going on.
26:40
Speaker 4: So if you can if you can reduce the amount
26:43
Speaker 4: of things that you need to adjust to, and you
26:45
Speaker 4: can treat your cash flow the same way you did
26:48
Speaker 4: like you have all the years you've been working, that
26:52
Speaker 4: that just really goes a long way and making the
26:54
Speaker 4: transition to retirement easier. So don't reinvent the wheel just
26:58
Speaker 4: because you're moving into re rehirement. So aim for aim
27:01
Speaker 4: for a three to six month cash reserve, three to
27:05
Speaker 4: six months of living expenses. Remember you're still going to
27:09
Speaker 4: have unexpected events in retirement, a medical bill, home repair,
27:14
Speaker 4: any of that can can still come up even though
27:16
Speaker 4: you're not working anymore. And one thing we do tell
27:19
Speaker 4: people as they are really closing in in retirement, maybe
27:22
Speaker 4: in that last twelve months. You know, if you're if
27:25
Speaker 4: you don't have a lot of liquid cash available, but
27:28
Speaker 4: you do have quite a bit in your retirement accounts,
27:31
Speaker 4: you might consider kind of shifting your focus from adding
27:34
Speaker 4: to the retirement accounts in order to build up that
27:36
Speaker 4: solid emergency fund before you move into retirement. And the
27:41
Speaker 4: last piece of this is, as you're looking to build
27:43
Speaker 4: that emergency fund, don't don't make it complicated. Set up
27:47
Speaker 4: an automatic transfer from your checking into a high heeled
27:51
Speaker 4: savings or a money market account. Think of it as
27:54
Speaker 4: you know the classic pay yourself first and just like
27:58
Speaker 4: I said, don't don't make it complicate, and help yourself
28:02
Speaker 4: out as you as you move in on retirement.
28:04
Speaker 1: Nobody ever regrets having a little extra money just set
28:07
Speaker 1: aside for important things that can happen, that is for sure.
28:10
Speaker 1: As we talk this morning with Eric Schwartz and CJ. Closs,
28:12
Speaker 1: our retirement planning professionals from class financial website Coss Financial
28:16
Speaker 1: dot com. That's Coss k l a as Financial dot com.
28:19
Speaker 1: Great website and one of the great things you can
28:21
Speaker 1: do on the website is submit a question to be
28:23
Speaker 1: answered and our Money in Motion listener question corner, and
28:26
Speaker 1: this week Scott wrote in the following question, he said,
28:28
Speaker 1: my wife and I are planning on selling our house
28:31
Speaker 1: when we retire, but we are concerned about the gains
28:34
Speaker 1: we might experience. Any suggestions on how to avoid taxes
28:39
Speaker 1: on those gains and see, ja, I'll leave this one
28:41
Speaker 1: for you.
28:43
Speaker 3: Yeah, well, thanks for the question, Scott. Again, everybody feel
28:46
Speaker 3: free to submit a question on our website and we'll
28:48
Speaker 3: we'll throw it into these questions at the end. And also,
28:51
Speaker 3: you know, feel free to call in during the show
28:53
Speaker 3: if you have a live question. We do always like
28:55
Speaker 3: to see if anybody can stump us. So, but yes,
28:59
Speaker 3: when sell selling your primary residence, Scott, there are definitely
29:02
Speaker 3: some tax benefits that could help reduce or even eliminate
29:05
Speaker 3: the capital gains tax you might owe. So if you've
29:09
Speaker 3: lived in and owned your home for at least two
29:11
Speaker 3: out of the last five years before the sale, you
29:14
Speaker 3: may qualify for what's called the primary residence or the
29:16
Speaker 3: home sale exclusion. This allows you to exclude up to
29:19
Speaker 3: two hundred and fifty thousand dollars of capital gains if
29:21
Speaker 3: you're single, or up to five hundred thousand dollars if
29:24
Speaker 3: you're married filing jointly. So for example, Scott, if you
29:27
Speaker 3: and your wife sell your house and your gain is
29:29
Speaker 3: less than five hundred thousand dollars, you likely won't owe
29:32
Speaker 3: any taxes on that amount of gain when you go
29:36
Speaker 3: to sell it. Now. A couple other quick things. Just
29:38
Speaker 3: be aware of if you've done any improvements, because some
29:41
Speaker 3: people say, well, you know I bought it for one
29:44
Speaker 3: hundred thousand dollars thirty years ago. I'm selling it for
29:47
Speaker 3: now seven hundred thousand dollars, so you know that's more
29:49
Speaker 3: than five hundred thousand of gains, So I guess I'm
29:51
Speaker 3: going to get blown up. Well, couple things, you would
29:54
Speaker 3: only pay tax on the portions that's over the five
29:57
Speaker 3: hundred thousand, so it's not that the whole thing becomes taxable.
30:00
Speaker 3: Number two, keep track of your home improvement expenses because
30:03
Speaker 3: I'll bet over that twenty or thirty year timeframe in
30:06
Speaker 3: my example, that you've put some money into the house,
30:09
Speaker 3: you've probably done some fix ups and maybe replace the roof,
30:12
Speaker 3: remodeled the kitchen. You get the idea, it is not
30:15
Speaker 3: only your original purchase, plus all of the improvements that
30:18
Speaker 3: you've made along the way. And then finally, just for
30:21
Speaker 3: Scott and everybody else, if you are close to retirement
30:23
Speaker 3: but not quite yet there, make sure you meet the
30:26
Speaker 3: ownership and residence requirements to qualify for this exclusion that
30:30
Speaker 3: I'm talking about. So even if you've rented out your
30:33
Speaker 3: house for a parade, as long as you meet the
30:35
Speaker 3: two out of five year rule, you should still qualify
30:38
Speaker 3: under most circumstances. However, in all of this, talk to
30:41
Speaker 3: your accountant, talk to your financial advisor, because the penalty
30:45
Speaker 3: for being wrong on all of this is pretty stiff,
30:47
Speaker 3: so just make sure you talk to them to know
30:49
Speaker 3: what to expect when you go to sell your house.
30:51
Speaker 1: Great guidance as always, CJ. Class and Eric Schwartz. They
30:54
Speaker 1: are our retirement planning professionals from Class Financially. You can
30:57
Speaker 1: learn more online the website Class financial dot com. That's
31:00
Speaker 1: Class k l aas Financial dot Com. Telephon upper for
31:04
Speaker 1: the office right here in Madison six oh eight four
31:06
Speaker 1: four two five six three seven. No charge for the
31:09
Speaker 1: initial get toino you appointment dec Coss Financial. It will
31:11
Speaker 1: be complementary to you again their number six oh eight
31:14
Speaker 1: four four two five six three seven. Go on to
31:17
Speaker 1: hold on to that telepha number as well. It's time
31:18
Speaker 1: now for the class quiz question of the week. It
31:20
Speaker 1: works like this. In just a moment, I'll ask you
31:22
Speaker 1: the class quiz question of the week. You will then
31:23
Speaker 1: have thirty minutes from the today's program to call the
31:26
Speaker 1: Class Financial Office right here in Madison at six oh
31:28
Speaker 1: eight four four two five six three seven.
31:31
Speaker 2: If you are the correct caller.
31:33
Speaker 1: First correct caller with the correct answer, you will win
31:35
Speaker 1: this week's prize, which is a twenty five dollars gift
31:37
Speaker 1: card too. Kabela's this week's class quiz question the week?
31:40
Speaker 1: Is this true or false? According to a twenty twenty
31:44
Speaker 1: four study by Mass Mutual, the average actual retirement age
31:48
Speaker 1: in the United States is closer to age sixty two.
31:52
Speaker 1: Is that true or is that false? Telephone number six
31:55
Speaker 1: oh eight four four two five, six three seven. First
31:58
Speaker 1: call correct answer win that twenty five dollars gift card.
32:00
Speaker 1: Toucabella's don't forget as well. That's Class Financial Office right
32:02
Speaker 1: here in Madison again that number six oh eight four
32:06
Speaker 1: four two five six three seven. C j Eric Great
32:09
Speaker 1: chatting with both of you guys, have a great day.
32:11
Speaker 2: Thanks Sean, Thanks Sean.
32:12
Speaker 1: Doctor Greer comes your way. Next from check out vet
32:15
Speaker 1: here on thirteen ten w U I b i