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Can You Plan for the Widow Tax? · How to Retire on Time

• 0:00
  Mike: Hi. Mike Decker, author of the book How to Retire on Time. Here's a question I was recently asked on my Retire on Time q and a. Check it out.
• 0:12
  David: Yeah. How do you plan around the widow tax?
• 0:17
  Mike: This is a tough one. And the reason is... So some people have saved enough. It's a non issue from an income standpoint. It's an issue from a tax standpoint.
• 0:30
  I guess, let me explain what the Widow Tax is first.
• 0:32
  David: Okay. Yeah.
• 0:33
  Mike: When when a spouse passes, you not only lose a Social Security income stream Mhmm. Assuming you've already filed, but you you also are now in the single tax bracket.
• 0:48
  David: Which has a smaller standard deduction? Well, it's one
• 0:51
  Mike: standard deduction and not two. Yes. And your tax bracket thresholds just got cut in half. Oh. So your taxes have significantly increased.
• 0:59
  Your bills have roughly paid the same, and you've got less income coming from Social Security. You're getting hit on multiple levels. That's a problem. And so when you look at tax planning, it's it's... This is another element too is, okay, you're both healthy which is great.
• 1:14
  We don't know how long the health is gonna stay there. We don't know if you're gonna get hit by a bus. And so what you gotta do is you have to kind of measure out what you're comfortable with on... And the way I like to look at it, this is oversimplified, but let's say let's say you're looking at a $100,000 of just total income for easy math. Well, you might wanna do $200,000 in your tax return.
• 1:40
  So a 100,000 is going IRA to Roth because you're concerned about your RMDs later on. RMD is required minimum distribution. In other words, what what does that mean? That means the government's forcing you to take money out. So so you're gonna get in front of it by maintaining roughly double the income that you already need in in in retirement, and that allows you that if a spouse passes, you just stop doing the conversions, you go back down, it's this a similar effective tax rate, and you maintain that.
• 2:11
  See, you wanna you wanna thread the needle of an effective tax rate while you're both alive to a projected effective tax rate if only one of you are alive. And that that's complicated. To be able to thread the needle of your tax planning, your IRA to Roth conversions, your Social Security sequencing, having maybe one Social Security benefit delayed for the surviving spouse, and then also the pressure that puts on the portfolio. There are many factors in there, but it's very important because if you don't look at this, and this again is one of the things we do at our workshop, is some people can afford to retire only if they both both of the spouses lived to 85 or longer. Oh.
• 2:52
  That's a tall order. Mhmm. You you gotta plan for these things.
• 2:59
  David: So and so so if you're planning with Kedric Wealth, then what you're saying is that we we will look at... We will we will broach that subject of, hey. What if... What happens if one of you dies? Here are the projections.
• 3:10
  Mike: Yeah. It's it's one of the 60 risks we look at in retirement. We do it even at the workshop. I just show you, hey, you can afford to retire. Life is good.
• 3:18
  Right? Let's have one of you die at about 80 years old, and it's like, oh, the surviving spouse got destroyed.
• 3:24
  David: Oh, yes.
• 3:26
  Mike: That's not a good parting gift. No. And there are ways to plan around it. There's more than one way to solve it. The point is, when you have your plan done first, your projections, Mhmm.
• 3:38
  And you're exporting strategies. This is a strategy you need to address. Which strategy do you wanna pick to address that issue? Mhmm. It's gotta be before you pick the investments and products.
• 3:50
  It's gotta be.
• 3:52
  David: And so what was the what was the sort of cliff notes, like, basic answer then? What if what if my spouse does diet at 80, and now I have half my Social Security coming in? What am I gonna do?
• 4:04
  Mike: You gotta plan today for that situation.
• 4:07
  David: Okay.
• 4:07
  Mike: This is not something you plan year before your spouse passes. As if anyone actually knew that were happening. Right. Right. I guess some people, their spouse is already in the hospital, which is a really sad situation.
• 4:18
  Mhmm. But gosh, yeah, this is... As we go into the holiday seasons. These are important things. Mean these are the conversations you need to have.
• 4:26
  Yeah. You know, It's like you gotta have the estate planning conversation. Hey, I'm not gonna be around forever. Here's how we're gonna handle it. Right?
• 4:33
  These are things that that we need to have as conversations. But from the widow tax, I think too many people are focused on other strategies like becoming the richest person in the graveyard, or having the most tax efficient strategy today, not realizing that their goals are completely destroyed by the widow tax later on. And that just a couple of adjustments can better align that balance.
• 4:59
  David: Okay.
• 5:01
  Mike: Yeah. Man, what a great series of questions today. They have been good. We've got time for maybe one more question if anyone wants to put that in the chat. But I I will say this, we do have our workshop.
• 5:12
  It's tonight at 06:30 central time. You can go to retireontime.com/workshop, or retireontime.com, and you can just click the button that says workshops and RSVP to that. If you wanna start your planning process with us, doesn't cost you to get started. We we will actually walk you through the first part of the planning process and show you what planning looks like. What strategy exploration looks like before we talk about any sort of investment or product because it's gonna be different for everyone.
• 5:41
  It doesn't cost you to start. It only costs you at the end if you decide you wanna finish the plan, if you decide you want it written up, and these are thirty forty page plans that replace advisors. But you know what? We also share our model in our subscription that's... That that one's coming out soon.
• 5:56
  We're making it more public. It's like $20 month. See, the hard part is the plan. Once you have the plan, if you can follow the system of that of that plan, you've got... Might...
• 6:08
  You might not need an adviser anymore. Mhmm. Maybe you come in once a year for a checkup, or at once every two years for a checkup, but you just got rid of one of the biggest bills. Mhmm.
• 6:19
  David: So... Was that ranking part of like after your own research, or can we look somewhere
• 6:23
  Mike: to Oh yeah. No one no one disclaims that. Yeah. They just say, oh, you know, but that's just kind of assumed, or they know they they skirt around the issue, but they never want to admit that.
• 6:31
  David: Yeah. Yeah.
• 6:32
  Mike: Yeah. $10,000 in AUM fees or assets under management fees is much bigger than the $4,000 tax issue. Now for those that have $57.10, $20,000,000, okay. Maybe in those situations, the fee... Well, I don't know if the 1% fee was gonna make sense anyway.
• 6:51
  Mhmm. Maybe you can negotiate the fee down or you work with someone like us that's a flat fee adviser. So you're paying an hourly rate for the work getting done, kinda like you pay your CPA for the work that gets done. Yeah. I mean, you work with a CPA that says, yeah, I'm just gonna...
• 7:05
  Whatever your taxable income is, I'm gonna take 1% of that as my servicing fee. No.
• 7:09
  David: It doesn't sit right.
• 7:12
  Mike: I get the financial services at, you know, in the seventies and eighties, the more money you had, the harder it was to move the money. But today you click a button and it's done. Mhmm. You can manage it on your phone. So yeah, that it ets me that people are bullied into the asset under management fee in this forced codependent relationship when it's actually your biggest expense in retirement.
• 7:36
  And I'm not saying that that's bad, just know what you're paying for. Mhmm. 1% doesn't sound like a lot, it actually can be.
• 7:46
  David: That's eliminating.
• 7:48
  Mike: And if you wanna learn more about different ways that you could get retirement support instead of paying $10,000 a year, $20,000 a year in fees for what typically is like once a year annual review, that's what the workshop is for tonight. That's like we go through these things. It's at 06:30. You can go to retireontime.com/workshop, RSVP. But appreciate you all being here.
• 8:11
  The hour's up. We'll be back next week, every Tuesday at noon. I just take your questions, and we answer them. That's all the time we've got for today's show. If you enjoyed the show, thanks for tuning the podcast.
• 8:21
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