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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And before we get to today's episode, I just wanted to take a couple of minutes to address something that one of our listeners, Rick D, brought up to me in response to the last series on long-term care. And that is some of my strong comments I made towards insurance salespeople and commission-based products that are sold by financial advisors. I'll
I'll be the first to admit, and I admitted this to Rick, that I can certainly get a bit too extreme when it comes to insurance products and financial advisor compensation models. For example, I often emphasize the giant conflicts of interest that exist when a financial advisor is paid a commission for selling a product like an annuity or a mutual fund or even a long-term care policy.
The point that I'm typically trying to drive home is that with this sort of compensation arrangement, it's just not always easy to figure out if what's being sold to you is in your best interest or theirs. Are they just selling you this product to meet a sales quota and make some more money? Or is it truly the best solution at the best price and something that you truly need?
That being said, I don't always follow up these comments by pointing out that there are plenty of great financial advisors and insurance salespeople who do have their clients' best interests in mind when making these recommendations, even if they're compensated with commissions. Because in reality, every compensation model comes with conflicts of interest and has its own flaws, even monthly fees and hourly fee models.
It's literally impossible for any financial advisor or any professional for that matter to remove all conflicts, which means you have to do your due diligence to find an expert that you can trust.
In many cases, paying a financial advisor or insurance salesperson a one-time commission to buy a single product like a hybrid long-term care policy, oftentimes that makes the most sense. You certainly wouldn't want to pay an ongoing annual fee for something that doesn't require ongoing attention and maintenance.
Now, you might have to spend a little bit more time doing your due diligence when working with a commission-based advisor, given that they aren't legally bound by the fiduciary standard, and fees and conflicts are not always clearly disclosed.
But that doesn't mean that they're all bad people trying to take advantage of you. Similarly, just because a financial advisor is legally bound by the fiduciary standard doesn't necessarily mean that they're a trustworthy person and you don't need to spend time vetting them out either. I'm sure there are plenty of, quote, fiduciary financial advisors who don't adhere to their fiduciary obligations and find ways to take advantage of clients.
In the end, just like any professional in your life that you might hire, it's critical that you do your homework and do your due diligence to ensure that you're hiring a trustworthy advisor who truly puts your interests ahead of their own, clearly discloses fees and conflicts of interest, and has a clean professional record.
I still believe that most people should be working with a financial advisor who adheres to the fiduciary standard 100% of the time, but that doesn't mean that there aren't great advisors who operate under different standards and fee models. And I'll admit it's not fair of me to make blanket statements without acknowledging that. So thank you to our listener, Rick D for reaching out and sharing his feedback. And with that, let's get into today's episode.
Last month, I was interviewed by Steve Chen, host of the New Retirement Podcast. While many of our podcast listeners don't want to do the heavy lifting and they want to delegate all of their financial and tax planning to a firm like mine so they can enjoy retirement, some of you guys thoroughly enjoy doing it yourselves. And if you are, if you're a lifelong do-it-yourselfer planning for retirement, newretirement.com would be a great platform for you to check out and consider.
In addition to their planning tools and calculators and helpful resources, they also have a great retirement podcast, and I was honored to be a guest. In our conversation, we dug into Roth conversions, tax decisions that you don't know you're making, legacy planning, and more. And with Steve's permission, I'm going to replay that interview right here for all of our listeners to enjoy. So with that, here is my conversation with Steve Chen on the new retirement podcast.
Taylor, welcome to our show. It's great to have you join us. Yeah, Steve, thanks so much for having me. I really appreciate it. Yeah, so just quick personal questions as we get going, but how's it going with three weeks in with kid number three?
It's going great. You know, it kind of reminds me how easy the newborn stage is. We've got a, uh, a four-year-old and a two and a half year old on top of the newborn. And they're the most difficult right now that the newborn just eats and sleeps all day. And, you know, I'm, I'm here trying to tackle these, these two toddlers and keep them under control, uh, while my wife recovers. So yeah, the newborn is doing great. We're really excited to have our family rounded out. We, we had a girl, so we've got two boys and a girl and yeah, we're feeling really good. That's awesome. Yeah.
Yeah. Just for our listeners, the way we got connected was, uh, Taylor posted on Twitter, a picture of his, of his new baby and kid number three with a caption, you know, see you never. And, uh, that resonated with me because I have three kids and I, I was like, yeah, there's kind of like a lost decade that you could be facing. And, and, you know, I think that's, uh, we bonded a little bit over that. Um,
Anyway, so, you know, but before we get into the kind of tax and legacy questions, just wanted to kind of get a little bit on your background, you know, how you got started as a financial planner and ultimately what led you to create your own firm.
Sure. So it actually goes back to when I was about age 12 or 13. Every Christmas, my grandfather was known for giving us some cash in an envelope. It'd be, you know, $20 or $50. And we're always excited to go to grandpa's house because we'd get some cash to go buy a video game or something. And, and that year, instead of cash, he gave us grandkids a stock certificate and
And he used that stock certificate as a tool to teach us about money and investing and how to look up the stock in the newspaper and dividends and compounding interest and all that good stuff. And I remember being really disappointed at the time, right? I wanted that cold, hard cash. There wasn't much I could do with the stock certificate at that time. But it really did kind of pave the way for me to becoming a financial planner. It piqued my interest in finance in general. And as I learned more and more, I just...
I knew that's what I wanted to do. So on day one, when I graduated college at age 22, I had a job at one of the very large brokerage firms here in San Diego, and I was thrown right into the fire. So I started kind of building my business then.
And I was there for, gosh, five or six years, and I kind of quickly learned that it wasn't my long-term home, as I'm sure a lot of your listeners are familiar with. The large, well-known brokerage firms don't adhere to the fiduciary standard. So I found myself sitting in a lot of these meetings listening to ideas for, you know, how we can make more money or how we can make the firm more money rather than how we can make our clients more money. And it just kind of felt backwards.
And so kind of once I uncovered this and learned more about the fiduciary standard and how we can do things differently for clients, I launched my firm. So I launched Define Financial.
in 2014. We now work with about 70 families around the country. We only work with people over age 50. We specialize in retirement and tax funding for those individuals. And we just stay really, really narrow and just work with that exact demographic. We like to just do our best work with those people.
I say you wouldn't go to a neurologist if you needed knee surgery. And so we don't want to try to serve everybody. We just love doing tax planning and investment management and retirement planning for people over age 50. That's awesome. Yeah. Did you start out saying, okay, we're going to focus on people over age 50 or kind of fall into it as you got a couple of years into the practice?
Yeah, I kind of fell into it, you know, just because you were taught in the early days to essentially work with anyone and everyone who was willing to trust you with their money. And so I had to kind of unlearn a lot of the things that I was taught. And again, just taking a page out of, you know, the doctor profession or the legal profession, you
you know, just learning that, you know, we can get really narrow and just do a really, really, really good job for a very small percentage of the population. We don't need to serve everybody necessarily. And I always just, I'm kind of an old soul at heart and I always just kind of enjoyed working with my older clients. And so we went backwards for a couple of years, transitioning, you know, some of the younger clients out to other firms and just getting really, really focused. So that's where we're at today. And
yeah, it's been really exciting and a lot of fun. And obviously with some of the tax changes coming up, it's been fun for us to work through those as well. Right. Well, it's a good niche too. I mean, when I talk with Dana, you can see just how much thought goes into it. And there's a lot of complexity, especially as people are kind of in that transition period, kind of leading into retirement, there's opportunities around tax efficiency. We'll talk about some of that. And then as you kind of first get into it, like how do you turn on the income, the psychology of
starting to spend versus save, thinking about healthcare, especially before Medicare. There's a lot that happens. Are you able, I mean, do you find your clients? I think a lot of people, when they think about this segment, they're like, oh, well, people like piling up money, but then when they get to retirement, there's really not gonna be that much to do. So will they stick around as clients? But it sounds like you're building a pretty robust practice.
Yeah, we actually hear the complete opposite. So a lot of the clients that join our firm are your traditional do-it-yourself investor who's been at Vanguard for 30 years and they've been working hard and saving money and investing in low-cost index funds and they've done a great job saving.
And when they start to think about retirement, they realize that the decumulation phase is very different than the accumulation phase, right? It's fairly straightforward to make money, save money, and invest it in low-cost funds and just, you know, keep your head down. When you get to the decumulation phase, it's like, "Okay, I've got, you know, all this money now, and they're all in different types of accounts with different tax treatments. How am I going to turn this into, you know, a retirement paycheck?"
maybe income's not a big issue for you. Maybe you have pensions and other sources of income. Then it becomes like, wow, I'm now realizing I'm gonna have a giant tax problem, right? At age 70 or 72 when required minimum distributions kick in, how am I gonna combat this giant tax bill that's gonna hit me? And so, yeah, we often hear, yeah, I've never worked with a financial planner, but now I'm realizing that I need to work with somebody. I just don't really wanna spend my retirement figuring this out myself. The other thing that we hear too is that,
There's always one spouse that takes the lead in the financial relationship for the household. We often hear, if I got hit by a bus, my wife or my husband wouldn't know what's going on. They want somebody in the picture to help them out. Yeah, we hear that too, for sure. I also think as people live longer and they face cognitive decline, there's some risk and there's going to be a bunch of questions about
you know, there's questions about setting up your legacy and your power of attorney and all that stuff properly. But if you, you know, think that, you know, there's a risk that someone's going to have weaker decision making, how do you, how do you navigate that? Yeah. And let's, we'll dive into that in a second, but, you know, on the tax planning side, just at a high level, you know, what are, what are some of the big considerations that, you know, your, your, you know, your users or clients come to you with?
Yeah, I think a common misconception by a lot of savers, whether you're in the accumulation phase or not, or, you know, you're entering retirement is, you know, I don't have that much money or I don't make that much money. You know, tax planning is for the ultra wealthy. And that's not really true, right? I mean, just choosing the type of retirement account that you're saving in a traditional IRA or a traditional 401k versus a Roth. I mean, that is a tax planning consideration or a tax planning decision that you can make. So, you know, some of the tax,
The top tax planning considerations are just that. So the types of accounts that you're using, that you're saving in, the tax efficiency of the investment vehicles you're using, right? Different tax treatment for individual stocks versus ETFs versus mutual funds. Roth conversions and charitable giving are two big considerations, which I know we're going to dive into today.
And then lastly, just really, really high level is starting this what we call proactive tax planning early. I think just too many people wait until they're retired or, you know, they're in their mid-60s to address tax issues in retirement. And not that you can't address them, you know, later on in life, but the earlier you start, the better. The more time we have to plan, the better.
So just in general, I'd say start tax funding early. Even if you don't think that you're a tax funding candidate for whatever reason, I promise you begin that journey now and start putting those things into place because you can do a lot between now and retirement and between now and end of life to reduce that tax bill.
And I just want to kind of preface, you know, today's conversation about taxes. We are not trying to avoid taxes, right? Like, we all need to pay our fair share of taxes. I'm totally on board with that. What we don't want to do is overpay the IRS, right? Leave the IRS a tip. So, a lot of what we talk about is just taking control over your tax bill because if you don't, the IRS is going to make you pay taxes on their terms.
and it can come at an inopportune time. So start that tax planning early, which is why we're having this conversation today. Yeah, for sure. I was having a conversation with a small business guy a couple of years ago, outside of our work, and he was actually in the tax business, but he owned a bunch of
valuable but illiquid assets in qualified accounts. And he was like, yeah, I could be facing huge RMDs
on these illiquid things. So I'm going to have this big tax liability. Like, you know, he had invested in businesses and real estate and stuff like that. And he was like, really having to think hard about how am I going to create the liquidity? And that's where I totally get it. Yeah. Getting in front of this, understanding what could happen. I think a lot of people don't realize that if they have a lot of assets, they could be having more income in retirement than they had when they were working. And they're going to have to pay taxes on that stuff.
Yeah, exactly. I often say, yeah, you could find yourself, you probably will find yourself in a higher tax bracket in retirement than as a working professional when all these things start to collide, especially if you have a pension, right? Pension plus social security plus RMDs, maybe you have, you know, rental real estate income. All of a sudden you've got, you know, a mid six figure income that you didn't anticipate. Yep.
So is there kind of like an order of attack when you're dealing with, you know, your clients where, okay, let's think about Roth first, let's think about donor advised funds, or let's think about contributions? I mean, how do you kind of, you know, approach it?
I think it depends on what stage of life you're in. If you're approaching retirement, one of the first things that we do with our clients is determine your total, what we call your total retirement tax bill. So how much are you going to pay the IRS from now until end of life? So let's just start there with that baseline and determine how much you're going to pay the IRS from now until the end of life.
Second to that, starting to identify your current tax bracket today versus your projected tax bracket in retirement, specifically, again, at those ages, age 70 and 72. Age 70 is when Social Security kicks in if you choose to delay it that long, and age 72 is the required minimum distribution age.
And so comparing your current tax bracket today to your projected tax bracket there in the future, and then you can start to work through, okay, what can I do between now and those ages to reduce the amount that I'm going to pay the IRS from now until end of life? And so that'll kind of dictate your order of operations.
If you're still in the wealth accumulation phase and not quite ready to approach Roth conversions and charitable giving and things like that, yeah, starting to think about your current tax bracket. If you're an extremely high tax bracket, yeah, I mean, taking that deduction now and using a traditional 401k makes sense. But I see far too often people just defaulting to a traditional 401k or a traditional IRA because they just don't know any better.
And it may not make sense for a large percentage of people unless you're in that really high tax bracket and you see that tax bracket dropping in retirement. So there's a few things to do there first to determine that order of operations. Yeah. Any kind of key things people should remember about if they're looking at a Roth that they should know about this and how it works? A Roth IRA or Roth 401k? Yeah.
I mean, we always say, you know, Roth is the magical account, right? You get money in that Roth and not only does your money and investments grow tax deferred, tax-free, but it also comes out tax-free. And so kind of the name of the game is getting as much money as possible in those Roth accounts. Now, there might be years, again, in the wealth accumulation phase where it might not make sense to put a bunch of money in your Roth.
even if you have the ability to, but at the end of the day, getting as much money into those Roth accounts as possible, not only can help your tax bill in retirement, but also provides just a ton of flexibility.
Because if you're in retirement and you have all of your money locked up in a traditional IRA and you need a new roof on your house, or there's an emergency of some sort, and you have to tap into your retirement accounts, you're going to have to pay a tax bill just to get access to that money. So having that Roth, again, not only helps with that tax bill, but gives you flexibility when there are unforeseen things that happen in retirement. Yeah. I know a lot of our users are
really thinking hard about doing Roth conversions from their normal traditional qualified IRA 401ks into the Roth vehicle if they have lower income years, you know, kind of at the end of their traditional career, but before they start Social Security. So maybe between 60 to 70, you know, can they capture some of the tax benefits and kind of fill up those marginal rates? But yeah, it's, you know, you have to be thoughtful about it and you've got to be prepared to pay the taxes now and kind of think through the long-term repercussions of it.
Yeah, exactly. And we call those years your gap years, the year you retire until age 70 and 72. And your gap years are prime years for tax planning. So yeah, you nailed it. One thing I want to highlight, though, is
you may not always be in a lower tax bracket, right? Let's just say that you're in your gap years right now and you're in the 22% tax bracket and you run some projections and you find out that you're going to be in the 22% tax bracket for all of retirement, right? It's not going to change. That doesn't mean that you shouldn't consider Roth conversions because having money in those traditional IRAs or traditional 401ks is
is essentially a growing tax liability. That RMD is just getting higher and higher by the day. So a very simple example is, you know, would you rather pay 22% on $1 million today or don't do anything, let that million dollars grow to $2 million and then pay 22% on $2 million, you know, 10 years from now? So we want to be careful of those growing tax liabilities too. It's not just always about comparing, you know, today's tax bracket versus the future.
for sure yeah yeah yeah and i think with rmds what a lot of people don't understand is that they grow
over time. So the percentage you have to take out annually is increasing as you age. So the IRS is saying, hey, I think they're going to live to age 90. At 72, you're taking out one thing. As you approach 90, the percentages become very significant. And if you have big balances, you're going to be like, okay, I'm wonking out 200 grand out of my qualified and paying taxes on it. I have no choice. So that can happen. And I think you have to be thoughtful. When do I want to use this money? Yeah.
Because you only live once. So last thing on Roth, you know, I think there's also some estate benefits to it as well, right? That it can go to your heirs in a much more tax efficient way.
Yeah, absolutely. I know we're going to dive a little bit more into legacy planning, but there are some new tax laws that went into effect last year. And if your child or grandchild, for that matter, inherits your traditional IRA, they now need to exhaust that account. They need to withdraw all the money from that account and pay taxes on it within a 10-year time period.
And depending on where they are in their working life, that may or may not be a good thing for them to have to hurry up and take money out of that account and pay taxes on it. It may not be what you want for them.
So by leaving them, leaving your heirs a Roth IRA instead gives them a ton of flexibility. So it's much easier for them to inherit a Roth IRA than a traditional IRA, especially given these new tax laws. So I think it's something to think about that.
Maybe even if there isn't a huge tax benefit to you for doing Roth conversions or stuffing money into a Roth 401k or a Roth IRA, maybe legacy planning is really, really important to you. So just forget about the tax benefits while you're alive. You know, you might be putting your children or grandchildren ahead of you and saying, "Well, I just want it to be much easier on them so when they inherit this bucket of money, they don't have to worry about taxes and the IRS, you know, breathing over their shoulder."
So something that I think often gets ignored and it's tough too, right? Because if you're 60, 65 years old, you still have a long time to live and you don't really know exactly what your intentions are going to be at death. So these are some hard conversations and
And they're fluid. You might not know today. And that's why I really encourage, especially married couples, to have these conversations regularly. Have a nice glass of wine and continue talking about what do we want to do with this money? Right, right. For sure. It's great. Well, last quick just color commentary on Roth before we go. So today I saw headlines on Twitter that Peter Thiel has stashed $5 billion in a Roth. And so some inside baseball news.
I know some folks that know him and like literally 10 years ago people are like yeah You should consider putting founding shares and holding in your Roth, you know because people are doing this and it's so funny to kind of fast forward now It's getting like airplay. I mean specifically people are saying this is something that like the Facebook Mafia are doing they're taking these positions and they're putting in Roths and to see it now like as a headline and by the way, it turned into five billion dollars and it's all tax-free and
you know, it's kind of kind of funny, but it's going to get a lot of attention. Clearly. I mean, that was not the intent, but you know, people will find ways to be super tax efficient or too tax efficient.
Yeah. And, you know, unfortunately with those headlines, it may be doing a disservice to, you know, to the rest of us now that that's front and center in the media and the news. Some of those loopholes might be closed now and that's kind of unfortunate, but yeah, it is wild to have $5 billion inside of a Roth IRA. I'm sure the IRS is not too happy about that.
Yeah. Well, I think that, you know, it's a confluence of like Roths, but also self-directed IRAs, which is another topic. I mean, I mean, I'm interested and I think some people are, you know, they're thinking about alternative assets and real estate and they're like, oh, like, you know, how can I hold this? Where can I put this, this asset? And, you know, there, there are some real tax efficiency things that you can do. All right. So a couple other things on tax planning, you know, just could you give us a little color on kind of donor advised funds, how they work, who they're for and, you know, how people use them?
Yeah. If you're not familiar with donor advised funds, do yourself a favor and start to read up on them or talk to your financial planner about them. I'll just preface what I'm about to say by saying you have to be charitably inclined first. So donor advised funds provide a great tax benefit, but you have to be charitably inclined. So we're not going to use a donor advised fund to try and save money on taxes. We're going to use it to be more intentional of
about our charitable giving and maximize those tax benefits. So if you're charitably inclined, I would highly suggest looking into donor advised funds. They're extremely flexible and they're low cost. And now there's companies like Fidelity Charitable that don't have any minimum. So sometimes when we think about charitable giving again, we think about the ultra rich. I don't have enough money to engage in meaningful charitable giving. And that's just not true, especially with donor advised funds.
The great thing about a donor-advised fund is you can put money in the donor-advised fund today and get the tax benefit, get the deduction from that contribution today, but you don't have to give away the money to charity right away. So, you put that money in a donor-advised fund, you can invest it in stocks, bonds, or just keep it in cash.
And then you can give that money away over time, maybe a little bit each year. Maybe you give it away all at the end of life, but you get the tax deduction in that given year. So if you have a high income tax year, a big tax bill coming up, and you know you're charitably inclined,
You might use that year to put a good amount of money in that donor advised fund, get that tax deduction today to help your current year tax bill, but then take your time donating that money throughout life. And again, it might be end of life. And this is where if you're not currently giving to charity. So one very simple example, maybe you give $10,000 per year to one organization every single year.
Well, again, you find yourself in a high income tax year. Maybe, you know, you know, you're going to give away $10,000 for the next 10 years. That's a hundred thousand dollars. Maybe you put a hundred thousand dollars today in that donor advised fund, get that tax deduction on a hundred thousand dollar contribution, and then still give away your $10,000 each year for the next 10 years.
So that's one common scenario. But the other is, well, I'm not engaged in charitable giving today, but in my trust, it says that end of life, we want $100,000 to go to these three charities at the end of our life. So in that situation, we often have this conversation with clients. Well, when you're not here anymore, you're not going to get the tax benefit, right? Yeah, your money will go to charity, but you're not going to get any benefit while you're alive.
So if you know you're going to give away a certain amount of money at end of life, you might consider putting that in a donor advice fund today. Take $100,000, put it in that donor advice fund.
You can invest that money while you're alive in addition to getting that tax bill or that tax deduction. And not only will you get a tax deduction in that current year, but that $100,000 could grow to $200,000 or $300,000 or $400,000 at end of life. Those charities are going to be really thankful that you did that. So again, start thinking about
you know, what do we want to do in terms of charitable giving and legacy planning and end of life and start to think about does a donor advised fund, you know, fit into any of this? These are, you know, big conversations and tough to have sometimes and not a lot of clarity, but, you know, you can also just start really simply too. You don't have to put six figures into a donor advised fund right away. You can start with a little bit and kind of see how it goes.
- Yeah. Really quick, if you don't mind, I just want to circle back to two more points on the donor-advised funds. One is, if you're engaging in Roth conversions during your gap years and you are charitably inclined, then using a donor-advised fund during those years can help offset that tax bill from the Roth conversion. Because remember, when you do a Roth conversion, you pay taxes on that conversion.
Not everybody's super excited about that. So you can use a donor advised fund at the same time to help offset that tax bill. So pairing a Roth conversion with a donor advised fund is a really, really great tax strategy to consider. The second thing I just want to make sure we highlight is
In a donor advised fund, you can contribute cash. You can also contribute appreciated securities, stocks, bonds, real estate. So if you bought Tesla stock, $10,000 of Tesla stock, and now it's worth $100,000,
you know, you're going to pay capital gains tax on that stock if it's in a taxable account. You can actually just donate those appreciated securities straight to the donor-advised fund and not have to pay those capital gains. So, not only do you, you know, avoid the cap gains, but you're able to maybe donate a little bit more to the charity because, you know, you're not paying taxes. So, donating appreciated securities to the donor-advised fund can be a great strategy to consider.
So your question about QCDs, qualified charitable distributions, this is another tax strategy, giving money from your traditional IRA accounts. You know, some people we talk to, they don't have just cash lying around to go and put money into a donor-advised fund.
But they have traditional IRA accounts. Most people have them. And again, at age 72, the IRS is going to come knocking on your door and you're going to have to take your required minimum distributions. And like you said, Steve, these can be hundreds of thousands of dollars each year and you may or may not need all that money.
So one way to avoid the taxes on that RMD because it's taxed just as like you earned it working, it's taxed as ordinary income. You can take a portion of that and you can send it to a charity through a qualified charitable distribution and it goes straight to that charity and you avoid paying taxes on the income. Now, you also don't have the money in your pocket anymore, right? It goes straight to charity.
But if you don't need the money and you're a charitably inclined, it's a great way to give to charity by using your RMDs if you don't have cash laying around. A common situation we see here, and we just ran into it a couple of weeks ago, a client gives a decent amount of money each month to their church. Let's just call it $1,000 a month.
And it just comes from their checking account each and every month, which isn't very tax efficient. So instead, what we've got them doing now is just donating it through QCDs. They're not doing it monthly. They're just doing it one time per year.
but now they're doing it through the qcd so pre-tax money going straight to the organization and now they're able to give them a little bit more because they're not paying taxes on the distribution so just a way to be a little bit more thoughtful about your charitable giving again it may not be about you you might not care about reducing your tax bill but when you think about it by you not having to pay taxes you could actually give the charity more money um so
you know, it does, it does benefit the charity as well. Right. So at a high level,
essentially, you're going to be forced to pay taxes one way or another. And if you use donor advised funds or QCDs, you can really essentially trade off some of your tax liability for charitable giving that you control and you can kind of dictate how your wealth is used versus the government at a high level. Exactly. Yeah. Makes sense. It's awesome. That's great. I really like the
combining the DAF with the Roth conversions because that's a big question we get is like okay I'm doing these conversions you know how do I cover that tax liability you know should I use a HELOC should I use savings you know do I use my my you know after tax stuff you know but the DAF sounds like a clever strategy to kind of you know if it's available to you to
kind of keep more control over it. So, yeah. And that goes back to, again, being proactive about this stuff. If you're not prepared to do Roth conversions, you can be really caught off guard by a giant tax bill. So again, the earlier you start, even if you're not going to start Roth conversions today,
You might know what the projected tax bill is going to be in a couple of years when you do start, and you can start putting cash aside to pay those taxes. So, you know, you're not scrambling at the last minute to liquidate securities or, you know, take money from a HELOC, God forbid, to pay those taxes. You can start to prepare for those tax bills ahead of time. Yeah, that's awesome. All right. Well, thanks for that color. So let's, let's jump into legacy planning. So, you know, first kind of high level question, you know, what percentage of your clients end up with kind of
enough money where they have to be really thoughtful about this? Or I guess, how do you position legacy planning and who it's for? Well, of course, we want to start off this exercise with making sure our clients are taken care of and they're on a good track for retirement, that they're confident in their own retirement plan. That's 99.9% of people want to know that their own retirement plan is safe and intact.
Most of our clients have done a tremendous job of saving money. So, you know, through that exercise, they realize we don't need all of this money. There's no way that we're going to be able to spend all of this money. To say most of our clients are in that situation. And then the question just becomes, well, you know, what are we going to do, right? Because if we don't plan, if we don't put a plan together for what is going to happen to this money,
You know, it may or may not align with your intentions. So a lot of this just starts with a conversation. And honestly, we'll have the conversation in our office or over Zoom. And our suggestion is, you know, go home and break open a nice bottle of wine and just sit and have this conversation with each other and start to talk about it. It's kind of a morbid thing, right? What happens when we pass away? But again, if you have more money saved than you're going to actually use and need, we should develop a plan for it.
And as you can imagine, someone who's in retirement or retiring in the next couple of years has to be very careful about the amount of risk that they take with their investments, right? When you're using your investments to generate income and create that retirement paycheck, we want to be careful about how much risk we're taking. We're not in the wealth accumulation phase anymore. Well, by engaging in some legacy planning and breaking your money up into some different buckets,
keep it simple and just say, you know, this bucket here is going to be invested for our children. Our children are going to inherit this money. Well, you know, you might invest that bucket more aggressively knowing that you're not going to lean on it for your own retirement, that it's actually for your kids, or maybe it's for a charity. Hey, this bucket of money is going to go, you know, to our donor advised fund and we're going to invest it really aggressively. So just like having this conversation is starting to think about that.
allows you to take more control over the different pieces of your plan and build a plan for them so you can maximize that money that you worked so hard to earn. Yeah, that makes sense. Do you see I mean, one of the things that I saw, at least with Michael Kitsis work was that for folks that are good savers, you know what your clients are and have kind of built up that chunk of money when they go to retire, they actually don't end up spending it. It actually keeps growing, you know, through their life.
Do you see that or do people actually spend it down? Yeah, it's very, very real. It surprises me every single time. Again, I just said that just about all of our clients have more money than they're able to spend and
Almost every single one of them has this challenge of just enjoying the money that they worked so hard to save. So a lot of our conversation is just begging them to go and enjoy retirement and giving them the confidence to do that. But it is this kind of double-edged sword because the people that have done so well at saving money and investing money
no, they have control over their spending. They have really good behaviors and it's hard to go from a saver to a spender, right? Like it's just hard to change that behavior later on in life. And so it is just weird, just like,
emotional, psychological transition that a lot of clients just really struggle with. Again, I think through some planning and earmarking certain dollars for certain things and going through a really thorough retirement planning analysis and giving clients the
the confidence to go and spend more than they're used to spending or buying that vacation home that they've always wanted, or, you know, flying first class, whatever it might be like starting to, to show them that it's actually possible can start to change the, you know, their behaviors a little bit. But, uh, you know, unfortunately we've had, you know, a number of clients pass away. We've never had a client pass away with $0 before. I'm not saying it's not possible, right? There are people that need to be very careful about outliving their money, but
But I think most people die with money in the bank. Most people at this stage of life are just are terrified to spend it down. So, yeah, you know, working through a plan and getting confident in, you know, what that plan looks like can make a huge impact. I mean, again, like, enjoy what you work so hard to save for.
Yeah, I think it's important for people to kind of also look forward and visualize, you know, what their life is like. So at 50 to 60, you're one way. At 60 to 70, you're another way. At 70 to 80, you're another way. And 80 plus, you're a different way, right? In terms of like what you're capable of and what you're going to want to do. And I think a lot of people are like, oh yeah, I'm just, you know, the future's coming and it's going to be like this. But, you know, nothing's guaranteed. And like there's people in our family that, you know, people, you know, they get sick or people pass away and you're in your kind of network of folks that you know. And it's like,
you know, hey, you know, if you knew that this was going to happen, like if you knew you had limited time, you might behave pretty differently today. Right. So you might be like, screw it. Let's take a bunch of cruises or let's go fly first class. You know, let's let's enjoy it a little bit. I think it is it is real, though. It's hard to get people to kind of shift gears, you know, from that saving to spending mentality.
Yeah. And again, going back to the charitable giving, a lot of people feel better about spending money on somebody else, right? You just have a hard time spending money on themselves or they don't really value, you know, big fancy vacations or, you know, expensive cars or whatever it might be.
But they put a lot of value in helping somebody else. And so now, again, charitable giving might fit into that and allow you to take the money that you've saved and put it to good work. So that plays into a lot of this. Yeah, 100%. I think also intergenerational planning is going to become a much bigger deal as
I mean, well, for folks that have more money, but in general, if we get more productive and hopefully more wealthy as a society, there's going to be more to kind of share out for other folks. Okay, so any other big considerations like when people are doing, I mean, legacy planning, like kind of what are the big components that people should be thinking about and mechanically kind of constructing? Yeah.
Yeah, I mean, you know, table stakes is to meet with an estate planning attorney, or if you're a do-it-yourself type person, there are some great, you know, online estate planning tools where you can do this stuff yourself, but getting the basic documents in place. I know you had an interview on this, getting your living trust and will and, you know, power of attorney and having a letter of instruction on file, you know,
these are table six. These are the things that you should have in place. It's amazing how many people come to us and just don't have the basics dialed in. So like first I would make sure you have that stuff dialed in. Um, second, even the people that do have that stuff, it hasn't been updated in, you know, five, 10, 15 years. And, you know, tax laws are changing. Estate planning laws are changing. Um,
Laws around your social media websites and pages have changed a lot. So we need to have those things updated. So go back to that attorney, get that stuff updated. From there again, and my wife and I just got done going through this in anticipation of our third child here,
They're hard conversations. And so her and I literally, you know, we spent the last few months having some of these really hard conversations about if we're not here, if we're not in the picture, what do we want things to look like?
And, you know, we met with our attorney and we had a great conversation with her and she gave us some things to think and talk about. And it took us a long time to sit and talk about those. And then we literally just like type them up in a document and then came back to the attorney to kind of formalize things. So I know it doesn't sound like very technical here. And I don't know if you're looking for a technical answer or not, but when it comes to legacy planning, a lot of it is you and your spouse, if you are married, you're
Really just having that conversation and identifying what's important to you. What do we want to happen? Where do we want this money to go? You know, again, tax planning comes into play here. Realizing some tax benefits today while you're alive instead of when you're, you know, not here at all.
And so once you have a clear picture of that, you know, getting the financial planner and the attorney back in the picture to, you know, put the pieces together, you know, what would be the next step from there? And like roughly, you know, what does this cost and how long does it take to kind of put these? I feel like a lot of people feel like they should do this. And, you know, you mentioned when we talked with Cameron Huddleston about this and she's, you know, scared the heck out of me with like what happened in her family and how you need to have all this stuff together.
And you know what? I still haven't done anything. It's just ridiculous because I'm in this space. So it feels like a lot of people know they should do it, but life gets in the way and then they don't take action. Yeah, so just cost and timing would be great to hear. Yeah, it surprises me to hear that. I mean, I hear that a lot too, that people know they should do it, but they just don't do it. It's just one of those things that they just kick the can down the road. And I don't think it's the cost that deters them. It's just...
It's not a really fun experience to go meet with your estate planner and put all these things into place. So my guess is for you, it's not the cost. And for most people, it's not the cost because we work with a great estate planning firm here. They only work with people in California. So if you're in California, feel free to reach out to me and I'll share their contact information with you. But you can get all this stuff done for under $1,000.
They're a great firm. There's no fancy mahogany desks or anything like that, but great attorneys. They only focus on California and you can get all this stuff done for under $1,000. If you have a really complex situation, it could cost 5, 10, 15, $100,000 for that matter. But for most of us,
It shouldn't really cost more than $5,000 to get all this stuff done. I think the biggest challenge is the time we have to reach out to the attorney, right? We have to go through this exercise. We have to answer some hard questions. We have to think about death, right? Just not fun. So, you know, to me, like,
even if you had to spend $5,000, this is some of the most important stuff that you could be putting together. But instead we like to talk about stocks versus bonds and Tesla and Bitcoin, but we still don't have a living trust and a will in place. Well, I know. And if you end up having to go through a probate, which is what is going to happen if you don't have the stuff put together, there's significant tax and time implications where
your family can't get a hold of money, the government's going to take like 10% automatically and it's a massive headache. So probate and on top of all that, probate attorneys charge a lot of money.
But just sit and picture your heirs, your children, your grandchildren having to deal with probate attorneys just after you passed away. They're grieving, they're sad, they're trying to get through this difficult time, and now they're dealing with probate attorneys trying to go through all this. I don't think that's what anybody wants.
again, you know, start to think about your, your errors in this and hopefully that motivates you, Steve, to go and get this stuff done. It does. Well, we've also had this idea of like one to many. So maybe we'll see if we can organize a class on it or something where we talk to your group and like, Hey, let's just get a bunch of people and do it all together. Cause it's something everyone should do. Um, you know, but no, I appreciate that. Yeah. And for sure. Um,
Any other, like when you're thinking about kind of legacy and, you know, organizing stuff, you know, things that people need to keep in mind and resources they should consider? Because I do want to get, I want to talk about that and then get into kind of some user questions.
I mean, I think we covered a lot there. Again, I would think about the ability to break up your savings and your investments into different buckets and investing those for different purposes. Starting to think about, you know, if you do have children, grandchildren that you want to plan for, you know, college planning, education, things like that. It allows you to, you know, maybe gather some tax benefits through it, but also just be more intentional about how that money is invested, you know, and what it's for. Yeah.
You know, gifting versus inheriting. I know a lot of families will gift money on a regular basis, but, you know, inheriting assets allow for that step-up in basis, right? If there are large capital gains that you don't want to realize, your heirs inheriting those get a nice tax benefit. So, you might think about letting your heirs inherit assets versus gifting them while you're alive. Now, there's a lot of considerations there to think about.
But again, I think it all goes back to like, what do we want to happen in the first place? And then you can start to back into all these different tactical ideas. But in general, I think you nailed it with like,
Most people just don't have the basics nailed down. So let's be careful about talking about all the tactics. Let's just get the basics nailed down and have those hard conversations with our family. And maybe that's the last thing I'll say is I had a great person. I'm drawing a blank on her name. I had her on the podcast and she talked about having these legacy planning conversations with your heirs, right?
Have them in the room and talk to them about what you want to happen, what your intentions are and what you've put together so that they hear it from you directly. I think that can be a really powerful conversation too. Yeah. I think one of the tensions I hear, especially for people that have, if they're in a situation where they're thinking hard about this and they tend to have a lot of money, and then one of the tensions is, yeah, I want to be intentional. I want people to know what I wanted, but I
But I also don't want to clue people in that, hey, you might become financially independent at 30 if, you know, I got a trust. Well, I have a trust question for you. But like, you know, and does that affect the psychology? It's mostly their kids, right? That, oh, I'm 20 years old. But, you know, if this happens and I inherit a bunch of money, then I might have to work super hard, you know. And I think people that...
you know, tend to have money. They're tend to be success driven. They want their kids to be successful and it's all about values and hard work and they don't want to take that away from their kids. Yeah, no, absolutely. Is there any way to bridge that or people just kind of talk, Hey, generally, like this is how we're thinking about it. And, you know, here's the values, but you know, you'll, you'll, you'll know more about the money later.
- Yeah, I mean, I think there's a lot of ways you can go about doing that. You know, there are ways to kind of control your assets from the grave, right? Putting things into trust and, you know, the great thing about a trust is that you can create your own law, essentially. You can literally write whatever you want in that trust. And so, if you set up trust for your heirs to inherit, these are irrevocable trusts, you know, when you pass away, so no changes can be made to them.
you know what it says is what's going to happen and it does allow you know people to control their money from the grave and dictate how the money is being spent and you know when it's being spent so yeah there are certain there are certainly ways to go about doing that but that also causes other issues too right uh you know frustration from your errors um or uh
paragraphs or sentences inside the trust that can be interpreted different ways. And so there's a lot of considerations there. Actually, this is the first question I had from a user, which is like, Laurie M was, you know, my question is, when does it make sense to set up a trust?
I think it varies state by state. In California, most people need, if you own a home, you should have a living trust. I don't care if you're 30 years old or 70 years old, you should have a living trust in these basic estate planning documents set up. Again, it just allows you to tell the court what you want to happen with all of these assets. Because if you don't, then again, probate comes into play and the courts will decide what happens to your money.
So, you know, in California, most people should have a living trust. In some states, not necessarily true but I'd say, yeah, you know, if you have, you know, assets, net worth over $100,000, you own a house, you have some investment accounts, you should have a trust. And again, it doesn't cost very much money and you get to just kind of write your own letter of the law. Here's what I want to happen. So, it is state by state but yeah.
I don't know what else to say. There's not an exact age or science to it. - No, no, that's good to know. I mean, I think for a lot of folks, they hear trust and they're like, "If I have three or five million bucks, I'll think about a trust." But sounds like, no, you should be really thinking about it at a much lower level. - Yeah, it is a broad term, right? And there's a basic living trust for you and your spouse, and you put your house in the trust, and you put your investment accounts in the trust, and your checking accounts in the trust. And again, you're just doing that so that when you pass away,
the courts, the executor knows what's going to happen to all these things, right? How it's going to be split up. Exactly. There's no question about it. You can get into really advanced trust planning. Like we were just talking about controlling money from the grave and breaking into multiple trusts and, you know, kids inheriting, you know, trust with certain laws. Like it can get really complex, but just basic, basic living trust will, you know, advanced medical directive. Like most people should have that into place. Okay.
Well, actually this leads into the second question, which is the more complicated situation. So we have one of our members, John R., what are the pros and cons of estate distributions based on age or life events? So 21, 25, 30, 35, graduate high school, graduate college, get married, have a house. I know some people have triggers, like you talked about making rules that they don't want the kids, if something happens, to get a bunch of money when they're 21 years old, for instance.
Yep. So again, one of the benefits of having a living trust, you get to make up your own rules. You can choose any age you want or certain life events or whatever it might be. And like John mentioned, there are pros and cons to doing this. And I think first, it's what are your intentions? I hear from some families that say, I want my son to have $100,000, I don't know,
at a certain age, I don't really care what he or she does with it. If he wants to go, you know, buy a Lamborghini or, you know, go invest it in Bitcoin, whatever, I don't really care. That's one thing. But there are others that say, you know, "I want my child to have this money to start a business or to buy their first house or to pay for their wedding." And they want to create some rules around that. And it might not also be a lump sum. It could be income, right? It could be a certain amount of income each year or income from the investments. I mean, you can spin this a thousand different ways.
So I think one of the pros is that you have control over what happens to that money, that they're not going to go, you know, blow it on something that you may not value.
But the con is just that too, that being controlled by somebody else doesn't always feel really good, right? Someone telling you what to do with this money. It's not your money, but it can certainly create some friction and some households and some frustration. Also, again, sometimes these things are not written super clearly.
I'm struggling to think of a really good example off the top of my feet, but sometimes it's just really kind of broad and it can be interpreted different ways. And it's really up to the trustee to, you know, finalize that interpretation. So you may not agree with the interpretation. It may not have been written really clearly and you as the beneficiary might start to get a little frustrated. So, yeah.
There are definitely pros and cons. I do think in general, most people do put an age at least on kids inheriting money. I don't think a 16-year-old needs to inherit a sizable amount of money at that age. So yeah, having some basic things in a place seems to be pretty common. Okay, great. Question here from Chris S.,
You know, it sounds like the vast majority of CFPs are focused on the asset building portion of our lives, which we talked about. How do you find a tax advisor who has the ability to give decent advice on the post-retirement end of things? I mean, is there some membership group or network? I mean, there's yourself clearly.
Yeah, it is tough because a lot of financial advisors, again, like I said at the beginning of the show, they want to work with everybody. And so you don't find a lot of specialists, people that only work with retirees in the decumulation phase of life. Chris asked specifically about a tax advisor.
it is possible to find a tax expert, not even a financial planner or a CFP, but a really good CPA potentially that helps with tax funding. It is again, really challenging to find
really good CPAs that are proficient in tax planning. Most CPAs just do tax returns year over year and they do it for a thousand families and they don't have time to do really nuanced tax planning, but a tax attorney even potentially. In terms of resources, I think honestly, the retirement podcast space, there's a handful of us retirement experts that have podcasts. So you might do some searches through the podcast apps and find
Some more retirement podcasts. Again, many of us own firms and work with people directly, but there isn't a network that I'm familiar with. Although napfa.org, N-A-P-F-A, it's a network of fee-only advisors, so advisors like myself that don't charge commissions or anything like that. You can filter for certain types of advisors, so you can choose exactly what you're looking for, and it'll pull up people that specialize in those things.
but you also run into advisors that have checked every single box. And no matter what you check, they're going to show up. So you're going to have to interview some people and do some due diligence and make sure you're finding the right person. Right. Well, I hear you on the podcasting thing. I think podcasts are excellent because you can kind of hear from the folks and judge for yourself. These people know what they're talking about and they have the experience that will be useful to me. All right. Well, look, you know, as we wrap it up, just, you know, some quick questions, you know, anything you want to share with our audience about kind of like
what's next for you, how you see building your firm going forward.
yeah again you know we work with about 70 families around the country uh you know ideally we want to add another 50 or so families to the firm uh we're a low volume firm we're not trying to you know uh be the next morgan stanley or anything like that so we're just very intentional about the the clients we take on they become like family to us so uh we're just very careful and grow slowly and intentionally so we're looking forward to taking on another 50 families or so and
I think we'll have a really good specialized business from there. So for me, you know, I've done a lot in the last 15 years of my career, and I really just want to spend time with people that really value me and value my expertise and we have a good relationship.
It's just not really about dollar signs. And so, yeah, just getting really clear on who we do our best work for and just really helping those people is what we're focused on. Yeah, fair enough. I think it's a great answer. I think one of the challenges is that, frankly, there's a huge need for this. There's just not enough people that are really awesome at it. And it's hard to do. Like I've talked a lot with Dana about this.
She does amazing work, but it's frictionful. It takes a lot of effort and thought. And so you can't do it at scale. And that's part of like, I'm not trying to push toward what we're doing, but that's part of what we're trying to think about is can we help at a baseline level folks kind of get at least build awareness about some of the things they should be thinking about. I still think there's going to be, there's a need for many more folks that are experts at this.
Yeah. I mean, I think there are plenty of experts out there. I know it can be a little tough to find, but they're out there. I think the one thing I would say, and this is not a sales pitch for us or our services or anything, but at some point you have to ask yourself, is this really how I want to spend my retirement? Is this really how I want to spend my time navigating tax planning and managing my investments even for that matter in retirement? What's really important to you?
You know, it might be interesting. I promise you, 99% of our clients are, you know, extremely brilliant. They can do this stuff themselves. They just kind of figure out, "That's not really what I want to be doing at this stage of life." So, yeah, it just might be one of those things that you outsource. But you do have to, you know, get over delegating that and, you know, delegate it to somebody else and letting them do it. And, you know, it does cost money, which, you know, is another hurdle for some people. - For sure.
All right. You know what? Just one quick question for you about kind of like maybe you don't think about this that much. But, you know, do you think about kind of the near term, like the next couple of years? Do you think that we're going to it? It feels like we're the world's changing a little bit. We've gone through COVID. You know, we're seeing a huge amount of capital out there. Asset prices are increasing. You know, do you.
you know, kind of have an opinion about where things might be going in the economy or do you kind of like, well, look, just bet on the U.S. economy. It's going to work out fine and not think about the near term or the tactical stuff too much. Yeah. You know, our guiding philosophy is to focus on the things we can control. And there's not a lot that we can control in the day to day markets and the economy and what the Fed's going to do with interest rates. It's interesting to pay attention to and keep your finger on the pulse, but we don't have a lot of control and we don't have a crystal ball.
I was speaking at a conference just before COVID and I was on stage speaking to a group of financial advisors and I was talking about stress testing your investments against a catastrophic loss, comparing it to '08 or '09, making sure you know how much risk you're taking in your portfolio. And I had an advisor jump up and start to kind of heckle me from the audience saying, "What are you talking about? The economy is healthier than ever. There's no catastrophic event around the corner. Like, people should be taking more risk."
And then, you know, we leave that conference and what do you know, a pandemic that nobody could predict happens and, you know, stock market drops 34% in just a matter of days. So, you know, we can't predict things on the upside, we can't predict things on the downside. You know, what I do know is that even if you're retired, you're age 65 today, you still have another 30, 40 years ahead of you. And I do know that over those 30 or 40 years, I feel very confident that things are going to be moving, you know, up and to the right.
So if you can stay focused on those things you can control and try to try to mitigate the noise out there, I think you'll be you'll sleep much better at night. You'll be much more successful at the end of the day. 100%. No, that's that's the exact right message. You know, focus on long term and kind of forget the noise. And that's who's successful.
All right. Well, look, Taylor, this is fantastic. Really appreciate all the insight on tax planning and legacy planning and some of the strategies you shared. And we'll put up some links we talked about. So with that, I'll wrap it up. So, you know, thanks for being on our show. Dottal Robeson, thanks for being our sound engineer. For the folks listening, appreciate your time. Hopefully you found this useful.
And if you've made it this far, definitely check out Taylor's Stay Wealthy in Retirement podcast. And you can also check out our site at NewRetirement.com or our group in Facebook, which is growing pretty fast. We just went over 5,000 people where people kind of just talk among themselves. And there are also experts in there, you know, asking and answering questions.
And then finally, any reviews for my podcast or Taylor's podcast are always welcome. Feedback is good. Helps, you know, get distribution out there. And with that, thank you and have a great day.