Latest / TaylorMade Retirement with Taylor Demars, CFP® / Your Retirement Claiming Strategy is Probably Backwards (Here's Why)

Transcript

Your Retirement Claiming Strategy is Probably Backwards (Here's Why) · TaylorMade Retirement with Taylor Demars, CFP®

• 0:00
  SPEAKER_01: Today's content is pulled from Taylor's YouTube channel.
• 0:04
  SPEAKER_01: If you want to watch the video version or catch more great content, subscribe by clicking the link in today's show description.
• 0:13
  SPEAKER_01: Welcome to Taylor Made Retirement, where we explore what it takes to build a retirement that works for your money and your life with third generation certified financial planner Taylor DeMars.
• 0:28
  SPEAKER_00: Imagine this.
• 0:45
  SPEAKER_00: And the sequence most people default to, the one that feels the safest, is usually the one that costs them the most.
• 0:50
  SPEAKER_00: My name is Taylor Demars.
• 0:52
  SPEAKER_00: I'm a certified financial planner and tax strategist.
• 0:54
  SPEAKER_00: Today I'm going to walk you through the three tax traps that punish you for claiming in the wrong sequence why the conventional order is backwards and how the right sequence can save you over six figures in retirement and still protect you if life doesn't go according to plan.
• 1:08
  SPEAKER_00: Let's dive in.
• 1:09
  SPEAKER_00: Just recently, Greg and Linda came to be convinced they had us figured out.
• 1:13
  SPEAKER_00: Greg is 63, he spent the past 30 years as an engineering manager, and Linda just retired from being a nurse for 28 years.
• 1:20
  SPEAKER_00: And between the two of them, they built a solid foundation.
• 1:23
  SPEAKER_00: Greg has about$1.8 million in his 401k, and Linda has a state pension that pays$42,000 a year, plus a 403B worth about$320,000.
• 1:33
  SPEAKER_00: And when both reach full retirement age, their combined Social Security comes out to roughly$78,000 a year.
• 1:40
  SPEAKER_00: Their plan?
• 1:41
  SPEAKER_00: Turn on Linda's pension right away since she had just retired and have Greg claim Social Security as soon as possible for what they called guaranteed income.
• 1:49
  SPEAKER_00: And then let the 41K sit and grow as long as possible.
• 1:52
  SPEAKER_00: They were relieved, convinced they had done everything right.
• 1:56
  SPEAKER_00: Their previous advisor told them this was the safe play.
• 1:58
  SPEAKER_00: And honestly, it sounds like it is.
• 2:00
  SPEAKER_00: You're guaranteeing income, you're not touching the nest egg, and you're letting compound growth do its thing.
• 2:06
  SPEAKER_00: But when we looked at how the tax code actually treats this combination of income sources, we found something that they never saw coming.
• 2:13
  SPEAKER_00: That sequence, the one that felt safest, would have cost them well over$100,000 in taxes that they never needed to pay.
• 2:21
  SPEAKER_00: Not because they did anything wrong, but because there are specific rules in the tax code that create a domino effect once multiple income sources overlap.
• 2:29
  SPEAKER_00: Greg and Linda were about to trigger all of them without even knowing it.
• 2:32
  SPEAKER_00: So let me show you what those traps are.
• 2:35
  SPEAKER_00: The first trap is something I call the Social Security Tax Torpedo, and it catches more people than you'd expect.
• 2:41
  SPEAKER_00: Here's something that most people don't realize about Social Security.
• 2:44
  SPEAKER_00: Whether your benefits get taxed doesn't have so much to do with how much benefits you receive, but depends on what the IRS calls your provisional income.
• 2:52
  SPEAKER_00: It's a formula that determines how much of your Social Security gets pulled onto your tax return based on your other income sources.
• 2:58
  SPEAKER_00: The formula is straightforward.
• 3:00
  SPEAKER_00: Take your adjusted gross income, add any tax exempt interest, and add half of your Social Security benefits.
• 3:07
  SPEAKER_00: That's your provisional income.
• 3:08
  SPEAKER_00: For a married couple, if that number stays below$32,000, your Social Security isn't taxed at all.
• 3:14
  SPEAKER_00: Between$32,000 and$44,000, up to 50% gets taxed, and above$44,000, up to 85% of your Social Security becomes taxable.
• 3:25
  SPEAKER_00: And here's the part that catches most people off guard.
• 3:28
  SPEAKER_00: Those thresholds were set in 1983, before the original Ghostbusters came out.
• 3:33
  SPEAKER_00: So naturally, more retirees cross them every single year.
• 3:36
  SPEAKER_00: Let me show you how this plays out.
• 3:38
  SPEAKER_00: Say you're a married couple, and before you touch your 401k, your provisional income sits below that$44,000 threshold.
• 3:45
  SPEAKER_00: No real tax hit on your Social Security.
• 3:48
  SPEAKER_00: But then you pull up$40,000 from your 401k to cover your spending for the year.
• 3:52
  SPEAKER_00: Suddenly up to 85% of your Social Security gets dragged onto your tax return.
• 3:57
  SPEAKER_00: You didn't spend anymore.
• 3:59
  SPEAKER_00: Your Social Security check didn't change by a penny, but now you're paying taxes on over$70,000 in income from a$40,000 withdrawal.
• 4:07
  SPEAKER_00: That's what I call the Social Security tax torpedo.
• 4:10
  SPEAKER_00: And for Greg and Linda with a$42,000 pension stacked on top of everything else, the math gets even more aggressive.
• 4:16
  SPEAKER_00: When I shared this with him, Greg looked up at me like I was making this up and said, How does this even possible?
• 4:22
  SPEAKER_00: And the honest answer is most people don't see it until the bill arrives.
• 4:26
  SPEAKER_00: Now, the torpedo hits your tax return in the year that you take the withdrawal, but there's a second trap that doesn't show up for two years.
• 4:33
  SPEAKER_00: And by then, most people have no idea what caused it.
• 4:35
  SPEAKER_00: The second trap is called IRMA, the income-related monthly adjustment amount.
• 4:39
  SPEAKER_00: Medicare looks at your modified adjusted gross income from two years ago.
• 4:43
  SPEAKER_00: So the withdrawal you take in this year shows up as a premium increase two years from now, long after you've connected the dots.
• 4:50
  SPEAKER_00: For a married couple filing jointly, the first IRMA threshold starts at$218,000 based on your 2024 income and 2026.
• 5:00
  SPEAKER_00: Cross it and your premiums start climbing.
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  SPEAKER_00: But it gets worse fast.
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  SPEAKER_00: By the second tier, premiums jump by$240 per person per month.
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  SPEAKER_00: For a couple, that's nearly$5,800 a year and additional surcharges.
• 5:13
  SPEAKER_00: That's a family vacation, a generous Christmas gift for every grandchild.
• 5:17
  SPEAKER_00: Gone.
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  SPEAKER_00: Not because you spent any more, but because you crossed a threshold you didn't plan around.
• 5:23
  SPEAKER_00: For Greg and Linda, a larger 401k withdrawal or a Roth conversion they didn't plan around could push them over that line, stacking Irma on top of the torpedo.
• 5:31
  SPEAKER_00: Now the third trap is the investment income tax.
• 5:34
  SPEAKER_00: And it doesn't hit everyone, but when it does, it adds an extra 3.8% on top of everything else.
• 5:41
  SPEAKER_00: Once your modified adjusted gross income crosses 250 grand for a married couple, the IRS adds this 3.8% surtax on your investment income.
• 5:51
  SPEAKER_00: Dividends, capital gains, interest.
• 5:53
  SPEAKER_00: Your 401k withdrawal isn't investment income by itself, but it raises your total income, which can pull your existing investment income into the crosshairs.
• 6:03
  SPEAKER_00: The pattern across all three traps is the same.
• 6:06
  SPEAKER_00: The withdrawal itself isn't the problem, it's where it falls in the sequence.
• 6:10
  SPEAKER_00: My team and I build this sort of coordinated plan.
• 6:12
  SPEAKER_00: There's a link in the description to book a call with me, or we can look at your specific income sources and show what your optimal sequence looks like.
• 6:20
  SPEAKER_00: So now you know the traps, but here's what makes this hard.
• 6:23
  SPEAKER_00: The sequence that avoids all three is the exact opposite of what feels safe.
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  SPEAKER_00: Most people here claim Social Security first, let the 401k grow, and it feels responsible.
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  SPEAKER_00: Feels like you're protecting the nest egg.
• 6:35
  SPEAKER_00: And to be fair, some advisors recommend this approach too, partly because a larger 401k balance means more assets for them to manage and bill on, but that instinct treats every income source like it exists on its own, when in reality, they're all connected.
• 6:49
  SPEAKER_00: I like to think of your retirement income like a Rubik's Cube.
• 6:52
  SPEAKER_00: You twist one side, change when you claim Social Security, and it alters three other side: your tax bracket, Medicare premiums, and Roth conversion window.
• 7:01
  SPEAKER_00: Let's go back to Greg and Linda.
• 7:02
  SPEAKER_00: From the time Greg retires until he turns 70, they don't claim a Social Security, not yet.
• 7:08
  SPEAKER_00: Instead, they fund their spending from strategic 401 withdrawals and some of Linda's 403B, keeping their taxable income in the 12, maybe the 22% income tax bracket.
• 7:18
  SPEAKER_00: But here's what becomes even more powerful.
• 7:21
  SPEAKER_00: Because their income is low during these years before Social Security is turned on, and while Greg's only taking what he needs from the 401k, they have room to convert portions of that traditional 401k into a Roth IRA at those lower rates, paying 12 or 22 cents on the dollar now instead of potentially 32 cents on the dollar or more later on when everything starts to stack up.
• 7:43
  SPEAKER_00: And that converted money grows tax-free.
• 7:45
  SPEAKER_00: Linda's pension is already running at 42 grand a year, which does take up some of that bracket space.
• 7:51
  SPEAKER_00: So the conversion room isn't unlimited, but it's still meaningful.
• 7:54
  SPEAKER_00: And every dollar they convert now is a dollar that won't trigger a torpedo or surcharge later.
• 8:00
  SPEAKER_00: Now, a quick note here: we don't want to let the tax tail wag the dog.
• 8:04
  SPEAKER_00: The strategy only works if it's built around the life Greg and Lindo want to live.
• 8:08
  SPEAKER_00: We're not asking them to sacrifice their lifestyle to save on taxes.
• 8:11
  SPEAKER_00: We're optimizing the taxes around the retirement plan we built to fulfill the lifestyle they already plan to lead.
• 8:17
  SPEAKER_00: Now, I should say when it comes to Social Security timing, I like to think about it through three angles I call the Social Security Triangle.
• 8:24
  SPEAKER_00: And this matters because when someone tells you the best time to claim, they're almost always thinking about just one of these three angles.
• 8:31
  SPEAKER_00: And you have no idea of knowing which one or whether their angle even applies to your situation.
• 8:36
  SPEAKER_00: The first angle is quantitative.
• 8:38
  SPEAKER_00: How do I get the most dollars?
• 8:40
  SPEAKER_00: That's where most people's heads go, and it's where most of the advice online lives.
• 8:44
  SPEAKER_00: The second angle is qualitative.
• 8:47
  SPEAKER_00: If the math doesn't make or break your plan either way, why wouldn't you claim sooner and enjoy guaranteed income during your best years?
• 8:54
  SPEAKER_00: Studies show people spend more when they have fixed income flowing in, regardless of how much they've saved.
• 9:00
  SPEAKER_00: And the third angle is survivorship.
• 9:02
  SPEAKER_00: What if the reason to delay isn't about you at all, but about making sure the higher earner's benefit protects the surviving spouse for potentially decades?
• 9:11
  SPEAKER_00: The right angle depends on your situation.
• 9:13
  SPEAKER_00: For Greg and Linda, it was a combination of all three.
• 9:17
  SPEAKER_00: But here's what I found.
• 9:18
  SPEAKER_00: Even when someone ends up claiming on the earlier end, the way their gut told them they wanted to anyway, walking through all three angles transforms that decision.
• 9:27
  SPEAKER_00: Instead of wondering whether they left money on the table or feeling a tinge of guilt for locking in a reduced benefit for life, they walk away with clarity and confidence they made the right decision for them.
• 9:37
  SPEAKER_00: It's a permanent one, and now they know exactly why they did it.
• 9:41
  SPEAKER_00: In order to not run out of money, every retiree is fighting two battles, whether they realize it or not.
• 9:46
  SPEAKER_00: The first is protecting against market crashes, especially in those early withdrawn years, when a bad sequence of returns can do real damage.
• 9:54
  SPEAKER_00: And the second battle is inflation, the slow erosion of purchasing power that makes today's dollar worth less and less over time.
• 10:00
  SPEAKER_00: For most couples on a similar timeline, both battles matter roughly equally.
• 10:05
  SPEAKER_00: But when there's a sizable age gap, the inflation battle takes on a whole different weight.
• 10:10
  SPEAKER_00: I see this in a couple we're working with right now, who he's in his mid-60s and she's in her late 40s.
• 10:15
  SPEAKER_00: If he passes at age 82, she still has a potential 40-year horizon ahead of her.
• 10:21
  SPEAKER_00: A dollar today won't buy half as much across that timeline.
• 10:24
  SPEAKER_00: His pension could disappear entirely depending on his payout option he chose years ago.
• 10:29
  SPEAKER_00: His social security becomes her survivor benefit, making his claiming decision not about him, but about decades of her financial security.
• 10:37
  SPEAKER_00: Their optimal sequence looks nothing like Greg and Linda's, and that's sort of the point.
• 10:41
  SPEAKER_00: The right order depends on variables most people never think to account for.
• 10:45
  SPEAKER_00: Now everything I've shown you so far assumes the best case scenario, meaning long lives, no health scares, and no surprises.
• 10:52
  SPEAKER_00: But retirement plans don't live on spreadsheets, they live in the real world.
• 10:56
  SPEAKER_00: And here's what most people miss about this strategy.
• 10:58
  SPEAKER_00: The reverse sequence we've talked about isn't just tax optimal, it preserves your options.
• 11:03
  SPEAKER_00: If a health crisis hits you at 64, you could pull the ripcord and turn on Social Security earlier.
• 11:09
  SPEAKER_00: Your benefit, yes, is reduced, but you haven't locked yourself into a rigid plan before that assumed perfect conditions.
• 11:16
  SPEAKER_00: If markets drop hard in, say, year two of retirement, your spending is coming from controlled withdrawals, not from a portfolio you're praying recovers.
• 11:24
  SPEAKER_00: Most people approach retirement income like checkers.
• 11:27
  SPEAKER_00: Take what's available, move forward, collect when you can.
• 11:30
  SPEAKER_00: But I think it's more like chess.
• 11:32
  SPEAKER_00: Same pieces on the board, but the positioning changes everything.
• 11:35
  SPEAKER_00: You don't need a bigger portfolio to come out ahead.
• 11:38
  SPEAKER_00: You just need a better plan to create a sequence that gives you room to adapt when life throws you a curveball.
• 11:43
  SPEAKER_00: If you know a couple approaching retirement with multiple income sources who's trying to figure this out, send them this video.
• 11:50
  SPEAKER_00: Sometimes the most helpful thing you can do is show someone that they have more options than they think.
• 11:54
  SPEAKER_00: So coming full circle, here's what happened with Greg and Linda.
• 11:58
  SPEAKER_00: After walking through the traps and redesigning their sequence, their plan looks completely different.
• 12:02
  SPEAKER_00: From 63 to 70, they're drawing from the 401k strategically while converting a portion to Roth each year at favorable rates.
• 12:09
  SPEAKER_00: At 70, Greg claims his Social Security to get that maximum benefit.
• 12:13
  SPEAKER_00: Their guaranteed income covers the vast majority of their spending, and the Roth they built up is their tax-free reserve for anything else.
• 12:20
  SPEAKER_00: Their RMDs start at 75 and will be smaller and more manageable.
• 12:24
  SPEAKER_00: They're not triggering the Social Security torpedo and not tripping up Irma thresholds.
• 12:29
  SPEAKER_00: And if anything unexpected happens, they have the flexibility to adjust without unwinding the whole thing.
• 12:35
  SPEAKER_00: After going through all of this, Greg told me something I think about a lot.
• 12:38
  SPEAKER_00: He said, it's not that we have more money, but it sure feels like it.
• 12:42
  SPEAKER_00: I finally understand how to use what we have.
• 12:45
  SPEAKER_00: And for me, that's the real shift.
• 12:47
  SPEAKER_00: It's not about the tax savings, it's about peace of mind, clarity, and control.
• 12:52
  SPEAKER_00: The same accounts, claimed it in a different order, can produce a completely different outcome, without working a day longer or saving a dollar more.
• 13:00
  SPEAKER_00: The claiming order most people follow feels safe, but for people with multiple income sources, it can quietly cost you six figures over the course of your retirement.
• 13:08
  SPEAKER_00: So now that you see how this sequence actually works, the question is what that means for your particular situation.
• 13:15
  SPEAKER_00: For a personalized answer, click the link in the description or scan the QR code on screen to book a call with me.
• 13:21
  SPEAKER_00: We'll map out your income sources, walk through your specific sequence, and show you where the opportunities are.
• 13:26
  SPEAKER_00: And if you actually have a pension or about to start one, I made a video about four things to know if you're retiring with a pension that goes on a deeper level on the specific topics we discussed today.
• 13:36
  SPEAKER_00: You'll see it on the screen here now.