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Why Income Order Matters More Than the Amount · How to Retire on Time

• 0:00
  Mike: Hey, thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look. So I read your Kipling article. Thank you.
• 0:08
  That was a fun one to write. This was the cash flow versus income. They're different for those who haven't read it yet. Can you give a more specific example of how much difference, can that make and how to apply it? So let me give you the homework.
• 0:22
  Okay. First off, understanding the differences, you're gonna look at line two b on your so ten forty is your your tax return summary basically. Okay. So if you look for the the ten forty, look at line two b, three a, and three b.
• 0:37
  David: Okay.
• 0:38
  Mike: That's gonna look at dividends reinvested in interest that's just showing up on there. Total up three or two b and three b. And that's ordinary income that if you're not spending is completely unnecessary.
• 0:51
  David: Alright. So
• 0:52
  Mike: if you're not spending it, why is it there? And could you shift it to a place where it's gonna make more sense? That's one example of it. That is income that's not being spent, therefore you're getting taxed on it. Okay?
• 1:07
  Another one is understanding your cash flow like I talked about earlier in the show. Understanding how to tap into basis. Your basis is what's not taxed Mhmm. But you can spend. And then, laddering the gains and other the other parts of it.
• 1:22
  We're talking $5.10, $20,000 a year in potential tax savings when you understand cash flow. The movement of money which shows up sometimes in your tax form and sometimes not. Versus income which is what shows up on your tax form whether you spend it or not, and spending which is what supports your lifestyle, it leaves your accounts in perpetuity. Let me give you an example. Okay.
• 1:50
  So we we did one earlier. 50,000, let's say, from, I'll just pick up where I left off. 50,000 from your IRA assets, plus 20,000 of long term capital gains. Okay. That's the income that's being calculated for this couple in Arizona.
• 2:04
  That's 70,000 taxable income and the rest was done as free cash flow because it was tax free because it was the basis. It was the original investment. Not getting taxed on spending it. Okay? 31,000 was roughly 31,500 and so in the standard deduction for 2026.
• 2:22
  David: Okay.
• 2:23
  Mike: Okay? So the federal tax is about 1,800. The Arizona tax in this example like 1,300. They're paying like 5%, four to five percent in your particular combined effective tax rate.
• 2:33
  David: Oh, yeah.
• 2:34
  Mike: I would actually change this a little bit. I would increase their IRA distribution to max out the 12% bracket, and actually shift then a little bit less from their brokerage funds. If I could structure a plan, and I do this sometimes when the conditions are right, that all of your IRA distributions stay within the 10 to 12% bracket.
• 2:55
  David: Mhmm.
• 2:55
  Mike: And if taxes switch, maybe it goes back to the 15% bracket and that's it. But if I could have all of your IRA distributions come from that part, this is again cash flow planning. It's the movement of money. Mhmm. And controlling how much is income, how much shows up your tax statement, so that you can spend more of your money and pay less in taxes.
• 3:14
  That's a beautiful thing. People often come and say, hey, when you do IRA to Roth conversions, I'm saying, hold on pump the brakes. Yeah. You've already have enough in your brokerage funds, your taxable funds. You've got a good amount already saved in your Roth.
• 3:27
  Why would we pay 22 to 24% on every dollar, 22¢ on every dollar, 24¢ on every dollar to get it to the Roth when we could line it up and just slowly drain the accounts? Yeah. Oh, because taxes are going up. How likely do you think it is that they're gonna tax the poor more? And if so, how much more?
• 3:48
  Because if we could slowly drain it at a lower tax bracket, and in your situation there wasn't R and D issues, why are you rushing it? Oh, my kids are higher income earners. Okay. That might make sense. How's your health?
• 4:04
  What's your longevity look like? Do you see how it's controlling the flow of your money versus the how much shows up on your income tax statement versus how much you spend? Those are three different conversations that we treat them all the same. Yeah. And then the other part too, so let me just, let me increase this here real quick.
• 4:23
  This will be fun. So, we're gonna do a 100,000 coming from your IRA assets. So we're deep into the 12% bracket but not all the way there. There's a little bit of wiggle room for just other things that come up. Little bit of long term capital gains.
• 4:40
  That's fine. Oh, wait. The long term capital gains totally tax free. Still within the 0% tax bracket. We still have about 30,000 or so of additional room.
• 4:49
  Maybe, just maybe Mhmm. We sell a few of the other assets. Again, is cash flow. We're choosing to change the flow. We're selling an asset to have it flow into another asset, reestablish your cost basis, so that in the future we can tap into more basis in the future.
• 5:09
  This is advanced stuff by the way. But there's a $30,000 portfolio adjustment we could do tax free to reestablish a higher basis, so that in the future we can tap into that and less taxes. Because we have a window right here on the 0% tax. Like, this is what real planning looks like. Yeah.
• 5:27
  I don't know, like, I've been doing this for over a decade and the first place I I ran the operation for the first practice didn't do this. The second place, didn't do this. I coached financial advisors across the country for several years as well. They weren't doing this. And I'm going, what in the world?
• 5:44
  Why don't we do tax advice when we're not CPAs? Yeah. You don't need to be a CPA to run a simple tax calculation. Yeah. To say, maybe we shouldn't actively manage your taxable account.
• 5:54
  David: Right.
• 5:55
  Mike: These are opportunities that come from proper financial planning, yet it's often missed. And looking back, people get pissed when they realize the opportunities that were just sitting there. So hopefully that answers your question, Mark. Alright. Let's keep going.
• 6:10
  Yeah. And put in the chat, we we've got maybe a little bit more time for a few others. Last minute if you wanna throw in the chat any last minute questions. This one's I've got from aside from trying to get most out of social security, what else should I consider when looking at filing my filing strategy?
• 6:26
  David: So the the the age old like, when do I file for security?
• 6:30
  Mike: Yeah. A lot of people will will look at it. How do I, you know, when do I expect to die and how do I get the most out of social security? That's fine. But like if you're married, that complicates it.
• 6:39
  Because the surviving spouse is gonna get a certain amount. So let me me tap into this here real quick. Okay. Just pull up my tax calculator here real quick. Okay?
• 6:50
  So let's say you're getting, if you wait till 70, you're gonna get 70,000 between the two of your social security. Okay? I'm gonna make this really simple. Okay. 70,000 and all you need is 40,000 from your IRA distributions.
• 7:10
  Okay. We're still in Arizona. So, 110,000 of total income that's showing up. But if you consider social security and how it's taxed, you know, 85% of it's probably gonna get taxed in this situation. Not all of it.
• 7:22
  That's pretty tax efficient. Yep. Now, hold on. Let's just just acknowledge that for a second. Okay.
• 7:28
  85% of a larger number is getting taxed.
• 7:32
  David: Oh, yes. So only 15% is not as tax free?
• 7:36
  Mike: Part of it's tax free. Yeah. Okay. Or you could pull it back, let's say 50,000 earlier. Okay.
• 7:44
  And I'm gonna increase the IRA by 20,000. Okay. So kind of the same spendable portion here, but 50,000 is now, it's still getting taxed mostly at 85%. But it's a smaller amount, means you've got more tax consequences from other resources. Because you have to bridge a gap somehow.
• 8:05
  Mhmm. So sometimes you have to consider, okay, how much tax free income is going to contribute to the long term side? Because you don't plan to retire and die. Mhmm. You plan to retire and live as long as you can with a healthy life.
• 8:19
  So, if you have longevity, consider a higher benefit is more tax efficient. You can start to drain your IRA assets earlier on, have more control over it and really focus in on that 12%, maybe a little bit in the 22% bracket, so that you can focus when you hit the IRA or the social security age of 70 and hit the IRA assets, maxing the standard deduction and the 10% bracket or whatever it is in the future and having a higher social I mean, we're talking a lot of extra money here because it's more tax efficient. Thousands of dollars. So you want to consider that too. Also, you want to consider if if if you switch from the married to the single bracket.
• 9:01
  David: Oh, yeah. Which could happen if a spouse passes away.
• 9:03
  Mike: When a spouse passes, you get one one social security benefit. Having that higher benefit is more tax efficient, helps with longevity risk, helps with the surviving spouse risk, and helps helps with the widow tax. A lot of people don't fully appreciate how difficult that is. Your spending probably won't change that much when your spouse passes. Mhmm.
• 9:24
  You're gonna get pushed to a higher tax bracket because the single tax bracket is much less forgiving than the married bracket.
• 9:32
  David: Yeah. In terms of standard deductions. Right?
• 9:34
  Mike: So if you can plan for a higher benefit for the surviving spouse, you're making the widow tax less difficult to to deal with. It's just there's there's there are several layers to this that need to be acknowledged. It's not just how do I get the most out of social security. That's a factor. You wanna look at your longevity.
• 9:59
  But you need to factor in these other variables so that you can make an informed decision. Mhmm. Sometimes it makes a lot of sense to file earlier on. Typically, 64 I think is the soonest because 62 and 63 has an accelerated reduction of benefits that you're locking in for life. So, maybe 64 is the soonest you want to take it.
• 10:19
  And then, you can make decisions. 64, 65, 67, 70. Split them if you're married. One's at 70, one's at 64. You know, you can do things like that.
• 10:31
  Hopefully that helps. Hey everyone, one last note. We're in the final stages of launching publicly our model that's been only available to our private clients. If you wanna be a part of that launch, the public launch, subscribe to us. Subscribe to us, retireontime.com.
• 10:52
  You can get that and so much more.