Latest / TaylorMade Retirement with Taylor Demars, CFP® / Why Everything Changes After $3M in Retirement Savings

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Why Everything Changes After $3M in Retirement Savings · 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.
• 0:20
  SPEAKER_01: With third generation certified financial planner Taylor DeMars.
• 0:28
  SPEAKER_00: Here's the strange thing about retiring with$3 million.
• 0:31
  SPEAKER_00: You can have more financial security than you've ever had, yet have more ways to make an expensive mistake.
• 0:37
  SPEAKER_00: Because around this level, a lot of retirees find themselves at the top of the nice edge.
• 0:42
  SPEAKER_00: There's a very real possibility that you finish retirement with far more money than you'll ever use.
• 0:47
  SPEAKER_00: But one or two decisions, especially this early on, can actually move your plan much closer to running out than that$3 million number would ever lead you to believe.
• 0:56
  SPEAKER_00: That's where I find that your decisions around taxes, withdrawals, your estate planning, and investment risk can start carrying very different consequences.
• 1:05
  SPEAKER_00: Yet most people keep planning this exact same way that they did when they had$1 million.
• 1:10
  SPEAKER_00: I'm Taylor DeMaris, I'm a certified financial planner and tax strategist.
• 1:14
  SPEAKER_00: And I've seen, after working with hundreds of retirees, four specific shifts that show up again and again in the households around this net worth.
• 1:22
  SPEAKER_00: So I'm going to show you not only what changes significantly when you save this much, but what decisions suddenly deserve much more of your attention.
• 1:29
  SPEAKER_00: And pay particular attention to the final shift, because there are two completely different ways you can mismanage$3 million, but they actually turn out to be the same mistake.
• 1:37
  SPEAKER_00: And everyone at this stage owes it to themselves to hear why.
• 1:40
  SPEAKER_00: Because for a long time, I would look at somebody who saved$3 million and think, what financial trouble could they possibly have?
• 1:47
  SPEAKER_00: Having worked with clients that started with my dad and grandpa have changed my mind.
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  SPEAKER_00: Here's some quick examples of what's true for someone that has$3 million saved versus$1 million saved.
• 1:57
  SPEAKER_00: Fast forward to when your RMDs begin at$50 and you have the$3 million in an IRA, today's rules would force out roughly$122,000 that first year, whether you want the income or not, on top of your Social Security.
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  SPEAKER_00: That's a floor that most people at a million dollars never see, and it just starts the domino tax effect.
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  SPEAKER_00: For example, that married couple has that floor plus Social Security, already putting them in the 22% federal tax bracket.
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  SPEAKER_00: In a state like California, about a third of every extra dollar they take out goes to taxes before they even spend a penny.
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  SPEAKER_00: To add insult to injury, income that high will actually start to impact Irma, Medicare's premium surcharges as well.
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  SPEAKER_00: Now, a market drop can be even more painful.
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  SPEAKER_00: If your$3 million drops by 20%, like the stock market did not long ago back in 2022, that's$600,000 off your statement.
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  SPEAKER_00: That's enough to buy perhaps a whole second home or even change your children's lives forever.
• 2:52
  SPEAKER_00: And as far as bear markets go, that was a mild one.
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  SPEAKER_00: From 2007 to 2009, stock market dropped more than half.
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  SPEAKER_00: I don't share this to fearmonger, but to highlight that the reality you're facing, which is at$3 million, the money starts making decisions for you unless you make them first.
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  SPEAKER_00: And the same handful of decisions, most of them in the first few years, tips the whole scale one of two ways.
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  SPEAKER_00: Either towards running out or towards a retirement that you never lived.
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  SPEAKER_00: Almost everyone guards against the first concern.
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  SPEAKER_00: But the good news is that right now, those decisions are still yours to make.
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  SPEAKER_00: Part of why this problem sneaks up on people is that with$3 million, it isn't what it actually feels like.
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  SPEAKER_00: If you're in your late 50s or early 60s, you were likely starting your career when a million dollars sounded like permanent wealth.
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  SPEAKER_00: But a million dollars in 1985 actually buys about what 3 million does today.
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  SPEAKER_00: And ever since then, you spent 30 plus years getting really good at earning, saving, investing, and then not making dumb dumb moves when the market goes down.
• 3:54
  SPEAKER_00: Retirement shifts that and is a different test with no paycheck, safety net, far fewer doovers, and just one try to get it right.
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  SPEAKER_00: And that's just this top layer that you're facing.
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  SPEAKER_00: That's where these four more shifts are underneath it.
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  SPEAKER_00: And the first one explains something I see constantly.
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  SPEAKER_00: Couples with a plan that works saying no to things that they can plainly afford.
• 4:15
  SPEAKER_00: Because one of the most common tax mistakes I see from successful retirees is completely understandable.
• 4:20
  SPEAKER_00: They're asking their CPA the same thing, which is how do I pay the least amount of tax in this year?
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  SPEAKER_00: And too often a low tax bill this year is actually the start of a much bigger one later on.
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  SPEAKER_00: Say you retire with both your pre-tax money and an IRA, but also a brokerage account and some cash.
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  SPEAKER_00: It's very likely that you can live off the brokerage funds and the cash for years and show very little taxable income, which on paper looks and feels fantastic.
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  SPEAKER_00: Meanwhile, your tax-deferred funds are gonna continue to grow.
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  SPEAKER_00: And then when those required minimum distributions come around, the ticking tax time bomb goes off, often flooding your income with those higher income amounts, whether you need the money or not.
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  SPEAKER_00: And even worse, after your spouse passes, the survivor is gonna then file as a single person on the same amount of income with tax brackets that are only half as wide.
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  SPEAKER_00: So to show you how this works, let's model out what that wealth actually limits, what you can buy.
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  SPEAKER_00: Let's take a couple in California who retired at 60 years old with$3 million,$2 million in IRAs, and one in a brokerage account.
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  SPEAKER_00: They're going about it the usual way by living off the brokerage account first and never converting a dollar into Roth.
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  SPEAKER_00: But now that they're 75, around halfway through the retirement, their brokerage account is gone.
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  SPEAKER_00: And their IRA, which was then$2 million, is now grown to about$3 million.
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  SPEAKER_00: The requirement of distribution is that$122,000 floor.
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  SPEAKER_00: With joint social security, assuming it's around$80,000 and then a$50,000 pension on top, they're starting every year near the top of the 22% federal income tax bracket, plus California's 9.3% bracket before making any additional elective withdrawals.
• 5:57
  SPEAKER_00: Now, let's assume their 10-year-old car finally dies.
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  SPEAKER_00: The replacement cost is a sticker price of$65,000, and there's only one bucket, one account left to pay for, which is their tax-deferred funds.
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  SPEAKER_00: So in order to net the$65,000, they're actually having to withdraw about$108,000 out of the IRA.
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  SPEAKER_00: And this is because the withdrawal fills up the rest of their 22% bracket and goes well into the 24%.
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  SPEAKER_00: And then California's continue to take an additional 9.3% of every dollar.
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  SPEAKER_00: And then two years later, Medicare's IRMA surcharges are costing them thousands more in premiums for that year's income.
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  SPEAKER_00: Close to 40% of whatever their withdrawal was never actually reaches the dealership.
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  SPEAKER_00: Take the whole California taxation out of it, and the car is still costing around$90,000.
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  SPEAKER_00: I've sat across from clients in nearly this exact situation.
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  SPEAKER_00: And despite their car spending more time in the mechanics than in their own driveway, they couldn't bring themselves to pull the trigger.
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  SPEAKER_00: Sadly, the responsible choice for a new and much safer vehicle was overshadowed by the forecasted tax bill, making it instead feel like a reckless purchase.
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  SPEAKER_00: So the fix to all this has to start years earlier while you're in your 60s, while you still have the time.
• 7:08
  SPEAKER_00: But even the obvious fix, which is to be converting as much as you can to Roth, perhaps, I see backfire as well.
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  SPEAKER_00: Say you retire at 60, your income drops, and you've got this attractive window for Roth conversions.
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  SPEAKER_00: But you've also spent 10 years saying that when you retire, you're finally going to take the whole family on a big trip or buy an RV, go around the country.
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  SPEAKER_00: Maybe it's building a shop.
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  SPEAKER_00: And in that year, it takes that additional$80,000 to$100,000 out of your pre-tax funds.
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  SPEAKER_00: The perfected spreadsheet says you should turn all that down.
• 7:39
  SPEAKER_00: We need that bracket room for conversions.
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  SPEAKER_00: But it would also miss the whole reason you've worked and saved in the first place.
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  SPEAKER_00: And that's how we see the tax tale end up wagging the dog.
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  SPEAKER_00: So instead, I prefer to prioritize filling your tax bracket with your ideal lifestyle first.
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  SPEAKER_00: Then we look at whatever attractive room might be left and decide whether converting makes sense.
• 7:57
  SPEAKER_00: And note that every one of those dollars that might go towards building the shop or taking the adventure with the family can still come out of the pre-tax account too, thereby whittling down that same balance that causes the tax time bomb, but this time it's intentionally and on your own terms.
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  SPEAKER_00: Going about this the wrong way is the slow way to get hurt at this level.
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  SPEAKER_00: It can take 15 plus years for the IRS to send you the real tax bill.
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  SPEAKER_00: The fast way to get hurt, I see, happens in the first two years of retirement, and that's the second shift.
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  SPEAKER_00: I like to think of this as the cause and effect, one you can control and one you generally don't.
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  SPEAKER_00: At$3 million saved, the two of these together can change the whole path of a retirement.
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  SPEAKER_00: For example, a pattern I see across many clients looks very similar to the following.
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  SPEAKER_00: A couple may retire around 60 with$3 million, and the plan looks healthy on paper.
• 8:46
  SPEAKER_00: Social Security is still a few years away, and they're careful spenders, and now they want to do the things that they've talked about for years.
• 8:52
  SPEAKER_00: Around here, that might be that significant home renovation, or maybe a snowboarding place in Arizona to skip the winter months.
• 8:59
  SPEAKER_00: And naturally, the first thing that a couple will ask me is, can we afford this thing?
• 9:04
  SPEAKER_00: And again, on paper, the answer can usually be yes.
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  SPEAKER_00: And that's the cause or the choice, but the effect is what comes after the fact.
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  SPEAKER_00: Say a major home renovation starts at$300,000.
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  SPEAKER_00: Plans change as construction does, and then the cost suddenly balloon to around$450,000.
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  SPEAKER_00: Then people haven't accounted for wanting to upgrade their furniture to match, updating the landscaping on the exterior, and so on.
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  SPEAKER_00: So you have to ask, where is that money going to come from?
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  SPEAKER_00: If you pull it all from the traditional IRA in one year, you're going to pay the piper out the wazoo.
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  SPEAKER_00: And then you met the income stack that we talked about in the first shift, that domino effect.
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  SPEAKER_00: If you raid the brokerage account, you're draining the one account that you spent the cash you've waited on for years to build up.
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  SPEAKER_00: If you have Roth funds, tapping on those is like killing the golden goose that's meant to be there for the rest of your retirement.
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  SPEAKER_00: At some point, this decision often becomes a matter of picking the least worst option.
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  SPEAKER_00: And the choice doesn't have to be a splurge on any single one.
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  SPEAKER_00: I actually see couples who take Social Security at 62 specifically so they don't have to give their portfolio a gut punch early on in retirement.
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  SPEAKER_00: In some cases, it yes can look smart to lock in a 30% smaller checks for the rest of their lives to protect the growth of their stocks.
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  SPEAKER_00: That can be the cause.
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  SPEAKER_00: Now, the part that you don't control is perhaps a year or two later, the market may drop 25 or 30%.
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  SPEAKER_00: This isn't something that we get to choose.
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  SPEAKER_00: If a couple in that scenario still needs$100,000 to$200,000 from their portfolio over the next year or two, and that money is all sitting in stocks, they're selling their stocks after the fall.
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  SPEAKER_00: And after you sell those shares, you'll never participate in the recovery you would have with a properly prepared portfolio.
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  SPEAKER_00: This often leaves someone with the hard choice of whether they touch stocks when things are down, or asking themselves if they have to go back to work or tighten their belt in order to make ends meet.
• 10:49
  SPEAKER_00: But zooming out on these problems, we see that the renovation alone wouldn't hurt them, but the downturn alone wouldn't have either.
• 10:57
  SPEAKER_00: It's just when we have the two together, with the next two years of spending sitting in all stocks, is when the nice edge starts tipping in the wrong direction for the worst.
• 11:06
  SPEAKER_00: The fix to all this is typified by a couple I met with not long ago who wanted to do a significant home project and pay for it in all one fell swoop so they wouldn't have to carry a mortgage.
• 11:16
  SPEAKER_00: But instead of doing that and causing a spike in their income along with the tax domino effect we talked about, we modeled out using a mortgage so they could take out a loan for a few years, so they could spread out the withdrawals over more years than just one.
• 11:29
  SPEAKER_00: It may sound counterintuitive, but at a certain level, a mortgage could be a tax tool for you.
• 11:34
  SPEAKER_00: And if this gets you thinking about what it looks like when all of your pieces get planned together, I've built for you a sample plan in the description.
• 11:41
  SPEAKER_00: It's following a fictional couple through the same seven-session process we use with clients.
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  SPEAKER_00: It's the second link in the description.
• 11:47
  SPEAKER_00: Now I said that the issue with having$3 million saved for retirement tips both ways.
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  SPEAKER_00: Running out is obviously the loud and painful part that most are worried about.
• 11:56
  SPEAKER_00: But at the same time, nobody calls me upset that they have too much money saved.
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  SPEAKER_00: But there's also a quiet way that the problem arises, and that's this third shift.
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  SPEAKER_00: Because when estate planning comes up in a meeting, most people want to just wave it off.
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  SPEAKER_00: Most people assume that I'm talking about how we leave money to the kids.
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  SPEAKER_00: They would rather use the money while they're alive and healthy enough to enjoy it with them than die with the biggest possible balance.
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  SPEAKER_00: And I completely agree.
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  SPEAKER_00: But we also can't build a plan that only works if you die right on schedule.
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  SPEAKER_00: So a good plan has to carry a cushion.
• 12:25
  SPEAKER_00: You might live to 100 or longer.
• 12:28
  SPEAKER_00: Healthcare costs might be much more than we anticipated.
• 12:31
  SPEAKER_00: And markets might disappoint us for a significant stretch of time, or maybe you might need some significant help with long-term care later in life than either of us ever expected.
• 12:40
  SPEAKER_00: The trouble with all that is that having saved$3 million, the cushion can equate to something that's absurdly large.
• 12:46
  SPEAKER_00: And a cushion that big does something to people.
• 12:49
  SPEAKER_00: I can't tell you how many times I've had clients with a significant portfolio treat it like that's the last jug of water in the middle of the Sahara Desert.
• 12:56
  SPEAKER_00: One client told me that he paid his month-to-month bills from his checking account, but for anything he considered fun, he counted it as a withdrawal from his savings.
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  SPEAKER_00: The antidote we find is to break the portfolio into separate jobs, starting with what it's going to fund, like giving travel its own line in the plan, right next to the basics like property taxes and insurance.
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  SPEAKER_00: We also look into how different buckets of money are taxed, including using tax-free Roth funds as a strategic source of income to smooth out large expenses, both those that are expected and unexpected.
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  SPEAKER_00: For example, it could be taking the entire family on a trip in one year, or just making sure your taxable income is low enough so it doesn't bleed over into the next tax bracket that's already heavy.
• 13:35
  SPEAKER_00: An unexpected one could be an emergency medical bill or helping a family member in a pinch.
• 13:40
  SPEAKER_00: If you recall that couple we talked about from the first shift, with a Roth IRA to pull from, that car replacement becomes a simple phone call, not an entire tax event and domino effect.
• 13:50
  SPEAKER_00: But we need to be clear about what a cushion in your portfolio ideally is meant for.
• 13:54
  SPEAKER_00: Money you never use is less of a trophy and feels more like a receipt of a retirement you didn't get to live, which sets up this last shift, which is how much cushion is right when you save this much.
• 14:05
  SPEAKER_00: Because by now you've seen both ways to mismanage$3 million.
• 14:09
  SPEAKER_00: The first was that renovation couple who looked at$3 million and thought we're fine, but quickly tipped into spending way too much.
• 14:16
  SPEAKER_00: The second is a couple carrying their$3 million portfolio like it's their last jug of water.
• 14:21
  SPEAKER_00: Their ending balance will grow every year, yet they spend their 60s over protecting their 80s.
• 14:27
  SPEAKER_00: Where they treat most expenses like it's stealing from their future self, which often looks a lot like not turning up the heat in the winter because utility bills keep feeling like they're going higher and higher.
• 14:37
  SPEAKER_00: One of these couples looks like they've overreached and overspent, and the other one looks responsible on paper, but actually has the same problem as the other, which is neither one of them knows how far they are from actually spending a reasonable amount.
• 14:50
  SPEAKER_00: I think that good planning should let you see that from a distance, giving you clarity on where your next three to five years of spending is actually coming from, even if the market drops, so that one bad year doesn't have to change how you live your ideal lifestyle.
• 15:02
  SPEAKER_00: And you should be able to see what a big potential decision does to your plan before you make it.
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  SPEAKER_00: When we stress test a real plan, what we often remind clients is that not everything that is possible is probable.
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  SPEAKER_00: Just because a worst-case scenario can potentially happen doesn't mean we have to reorient our entire plan as if it's impending tomorrow.
• 15:21
  SPEAKER_00: I'd rather have a list of backup moves ready in case it does.
• 15:25
  SPEAKER_00: For example, with one client Clampel this year, they felt that their retirement projections were just too good to be true that they couldn't afford their early retirement plan.
• 15:33
  SPEAKER_00: So to appease that, we actually turned up the dial to the worst-case scenario of how ugly healthcare costs and how low Social Security cuts could actually be.
• 15:42
  SPEAKER_00: While, yes, their projected probability of success dropped significantly.
• 15:46
  SPEAKER_00: This allowed us to then have the conversation to say what backup levers do we have in place in order to make sure the plan still has ends meet.
• 15:53
  SPEAKER_00: This strategy allowed them to have the confidence to not only upgrade their RV, but purchase the camera equipment that they were looking forward to for their side hustle in retirement.
• 16:02
  SPEAKER_00: I bring all this up because it's also why I feel that a 100% Monte Carlo score in a retirement plan is far from being the goal.
• 16:08
  SPEAKER_00: 100% probability of success is better viewed, in my opinion, as 100% probability of underspending and underliving in your retirement.
• 16:16
  SPEAKER_00: This is the biggest thing that my clients over time have changed my mind about.
• 16:20
  SPEAKER_00: Once we've found the things that could tip you into real trouble and we've then protected against them, I don't think my job is about making your portfolio size bigger and bigger over time.
• 16:30
  SPEAKER_00: My job is about helping you use your best years with enough cushion that one bad break doesn't sink the plan entirely.
• 16:36
  SPEAKER_00: Because the window where time, money, and health doesn't stay open forever.
• 16:41
  SPEAKER_00: And that's why I say everything changes around this$3 million saved level.
• 16:45
  SPEAKER_00: Obviously, nothing changes when you literally cross$3 million and$1.
• 16:49
  SPEAKER_00: It's just that your numbers start crossing the lines where the rules are written around.
• 16:54
  SPEAKER_00: The income floor is starting to show up, the ideal purchases get bigger and bigger, and the drops in your plan get big enough to really hurt.
• 17:01
  SPEAKER_00: And then the portfolio cushion gets big enough to hide behind.
• 17:05
  SPEAKER_00: If you're looking for help to find out where that edge sits of how much you can spend in your own plan, the first link in the description is where you can book a call with me.
• 17:12
  SPEAKER_00: I'm not the right fit for everyone, and that call is where we'll find out if we're a mutual fit.
• 17:16
  SPEAKER_00: And if you'd rather look at what we actually do before we talk, the second link in the description is the sample plan I talked about.
• 17:22
  SPEAKER_00: Now, this next video on screen is the most popular one on my channel with well over a million views.
• 17:27
  SPEAKER_00: It breaks down why I see people making a mistake by working past age 60.
• 17:31
  SPEAKER_00: You can click on it, and I'll see you there now.