New retirement withdrawal rule could backfire in costly way
Most Popular Reply
Quote from @Jeff S.:
@V.G Jason the article that this heading came from is referring to Biden allowing people to not have to start RMD (required minimum distribution) until 73 supposedly making it easier to save for retirement.
The kicker is you save when young and that money sits wherever accumulating future tax burdens without you knowing what your income might be like when you are 73 or 75 or whatever.
The plan is to have lots of income from rentals or dividends or all of it and even though there is no w2 you are in a high tax bracket so cashing in those deferred accounts pushing you into higher brackets.
To top it off your SS gets taxed at higher rates and your medicare premiums goes through the roof. Consequently many folks try to put off cashing in the deferred accounts only to pay big time later.
Retirement will be interesting to see it play out. It's hard to speculate, I think the best things we can do is minimize all debt by the time we enter it. That's been my strategy. I always get asked why I don't retire young, and people who do that never realize they're going to be behind the 8 ball within 3-7 years. If they're lucky, maybe a decade. I think the safe assumption is to assume SS won't be there, taxes will be higher, and you need to eliminate debt but have 3-5 sources of income. Taxes will be what they are we really cannot control that. RMDs are a trick.
28 Replies
- Are you telling people that traditional tax accounts will get screwed harder and roth will get screwed for their efforts ahead of time, or what?
Quote from @Jeff S.:
I know all you youngsters think you won't get older but it happens. So what you say.
For those of you that are socking money away in tax deferred accounts planning on taking it out in old age. If you have a lot and your distributions are really big like you hope, the tax man will have his day with you. Think that financial planner can tell the future about tax rates later?
- 3yTaylor DaschBusiness MemberReal Estate Agent · Temple, TX · Member since 2022 · 1k+ posts · 700 votes
The retirement accounts all trash in my opinion. Even at a 2/1 match on my W2 job I would invest it in to RE if I could. The issue is that they dont let you withdraw it until youre 65. Living until 65 isnt guaranteed so you could have used that 50-100k to travel, have fun, invest, etc. But since you waited to retire it is all down the drain ( I realize it can go to your family if you die ).
If that was the only viable option, I would be happy to keep all my money in a retirement account and live off of that when I am older, however investing in Real Estate has opportunity to give me the monthly income that I would make as well as the opportunity to do things that I want right now without having to worry about finances! Thats why I like it!!
Taylor Dasch | EG Realty561 Reviews - 3yEric CozbyPro MemberAccountant · Fort Myers, FL · Member since 2015 · 12 posts · 10 votes
This is why diversification is important. Roth accounts allow you to hedge against higher taxes in the future (more likely than not, in my opinion), and RE investment can help save taxes now, while still providing income now and into the future.
RE is part of my retirement plan, but so are IRAs and 401Ks.
As a side note, I had a professor during my freshman year of college (a financial planner) who recommended we save for retirement as if Social Security was not going to be there for us. That's something I have never forgotten.
Quote from @Eric Cozby:
This is why diversification is important. Roth accounts allow you to hedge against higher taxes in the future (more likely than not, in my opinion), and RE investment can help save taxes now, while still providing income now and into the future.
RE is part of my retirement plan, but so are IRAs and 401Ks.
As a side note, I had a professor during my freshman year of college (a financial planner) who recommended we save for retirement as if Social Security was not going to be there for us. That's something I have never forgotten.
Oh 100%. And if I am wrong---good.
@V.G Jason the article that this heading came from is referring to Biden allowing people to not have to start RMD (required minimum distribution) until 73 supposedly making it easier to save for retirement.
The kicker is you save when young and that money sits wherever accumulating future tax burdens without you knowing what your income might be like when you are 73 or 75 or whatever.
The plan is to have lots of income from rentals or dividends or all of it and even though there is no w2 you are in a high tax bracket so cashing in those deferred accounts pushing you into higher brackets.
To top it off your SS gets taxed at higher rates and your medicare premiums goes through the roof. Consequently many folks try to put off cashing in the deferred accounts only to pay big time later.
Quote from @Jeff S.:
@V.G Jason the article that this heading came from is referring to Biden allowing people to not have to start RMD (required minimum distribution) until 73 supposedly making it easier to save for retirement.
The kicker is you save when young and that money sits wherever accumulating future tax burdens without you knowing what your income might be like when you are 73 or 75 or whatever.
The plan is to have lots of income from rentals or dividends or all of it and even though there is no w2 you are in a high tax bracket so cashing in those deferred accounts pushing you into higher brackets.
To top it off your SS gets taxed at higher rates and your medicare premiums goes through the roof. Consequently many folks try to put off cashing in the deferred accounts only to pay big time later.
Retirement will be interesting to see it play out. It's hard to speculate, I think the best things we can do is minimize all debt by the time we enter it. That's been my strategy. I always get asked why I don't retire young, and people who do that never realize they're going to be behind the 8 ball within 3-7 years. If they're lucky, maybe a decade. I think the safe assumption is to assume SS won't be there, taxes will be higher, and you need to eliminate debt but have 3-5 sources of income. Taxes will be what they are we really cannot control that. RMDs are a trick.
@Taylor Dasch it is a head scratcher for sure. Agree totally with what you say.
@Eric Cozby makes sense as far as not hoping to need SS. I don't think most plan on using it but if/when you do get it it is really nice. I am one of the last lucky ones to get it at 66.
In my life nothing has worked investment wise except RE.
@V.G Jason I had a friend that had 10 houses that said she sat down and figured out she could retire selling all of them on contract. She was 45. 10 years later she was looking for work.
Your health is a good investment. You can work yourself too hard just to make others rich.
Quote from @Jeff S.:
@V.G Jason I had a friend that had 10 houses that said she sat down and figured out she could retire selling all of them on contract. She was 45. 10 years later she was looking for work.
Your health is a good investment. You can work yourself too hard just to make others rich.
I feel for her. Risk management is key.
I hope to get a portfolio myself, but the selling aspect will be in portions. That's just how you scale it.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
It's nice for those that need it for the RMD age to rise a little bit.
Don't let a lower income year pass without converting all you reasonably can to a Roth up to your next tax bracket.
I have zero in taxable retirement and my wife should be fully Roth converted over 3 years beginning in 2024.
I think its 2026 tax rates return to what they were before 2017. Be informed and convert on purpose.
- Real Estate Agent · Fayetteville, NC · Member since 2022 · 214 posts · 293 votes3y
I think it's important to note that when saving for retirement, developing your strategies, and looking for the vehicles you wish to use to obtain those- you must consider Cost of Living. Cost of Living is not just inflation related. Before I dive in on that let me prep those points.
Retirement savings should have an intended goal. Something that is obtainable, and this is an easy to number to quantify. Take your current annual income, and multiple it by 20- in 20 years you should produce a minimum of that amount of income, which is what your "Human Life Value" is. This is a number that is frequently used to determine the appropriate combination of whole and term life insurance to protect one's life value. Clearly if someone is intending to stop working within those 20 years, an adjustment can be made to identify an appropriate amount.
There are 6 critical factors to consider for future cost of living as it relates to retirement.
1. Inflation; this is the obvious slow creeping killer of your finances. Inflation doesn't mean you have less money, it just mean your buying power with that money has now become less. 3% increased annual inflation over a period of 25 years can steal nearly 50% of an assets value or cashflow (If there's no positive return involved). No one wants their 401k cut in half today do they?
2. Taxes; another obvious charge that must be incurred. Do not kid yourself- you are not only just being taxed on your retirement vehicles if applicable. You are taxed on everything else- sales tax, inheritance tax, license tax, property tax, even dog license fees will go up in the future. These must be considered, especially as you understand your buying power will be less, and you will have more taxes. You must also consider the possibility of taxes that do not exist yet! If you would've told oil companies 50 years ago they could possibly be taxed on carbon emissions they would've laughed you out of the country. There will be a slew of taxes added to us, that we aren't aware exist yet. This must be considered.
3. New Technology; think of all the things that exist today and did not in 2000. Or in 1980, or in 1950. The cost of upgrading, replacing old tech with the new does not just cost you the $$ price tag. It costs you what that dollar could have earned you if invested as well. There is no real way to recapture that lost dollar as the theory of obsolesce will always have us buying things we will never get a return from. Think of your cellphone, 20 years ago no one thought there would be a need for something like that, and now we cannot live without them. This is a real understanding that must take place, as spending $1,200 on a new phone, is $1,200 invested at 7-8% annual return that you just lost. Forever. You didn't lose $1,200, you lost at the bare minimum- $4,644 over a 20 year span. That's an expensive cell phone.
4. Product Wear and Tear; You will have to replace things that fall out of good working order. Is it not likely that these prices will rise in the future due to inflation? Is it not possible that in the future there may be replacement services that are required we haven't thought of yet? What if Elon Musk makes robots that actually become popular in home devices, will there be a repair men for those? Will parts have to be serviced for them? Over time these cost must rise due to inflation. Have you thought about where the money for these things is going to come from?
5. Improved Lifestyle; it's human nature to want more and better for ourselves. There is nothing inherently wrong with this, but as many have stated on this thread and others, people want to enjoy the money of their retirement. Travelling, enjoying things they didn't get to while super busy. Not only this, but eventually people want nicer houses, better cars, new phones, new computers, faster internet speed, HBO MAX instead of HBO plus- you get the point I'm making. It's practically impossible to accumulate wealth, have a family, and not overtime improve your quality of life through the financial gains made. It's common sense, but these 10-20-30-40+ years of slowly improving your lifestyle has to be paid for, and accounted for. Be cognizant of this with your long term planning and identifying where unknown expenses may need allocation.
6. Unexpected Life Events; there is no limit to how many, when, why or what unexpected life event may occur to anyone one of us. Some can have drastically negative, drastically positive, somewhere in between, or little to no impact on our lives. It only takes 1 or 2 extreme unexpected life events however to completely upend someone's lifetime of good financial decisions. There's little room to predict for these things, as there is typically no warning. The best defense from unexpected life events is how you protect yourself. I.E. Insurance, living wills, trusts, and other protection vehicles.
All 6 of the economic factors must be taken into consideration when seeking the best understanding of retirement goals, and which vehicles will obtain it; as well as how much realistically your money will be worth. If you want have the buying power of $1,000,000 in today's dollars, you will need at least $2,000,000 in 25 years from now dollars. The value of your money will never be worth more than it is at this exact moment. Anyone would do well to remember that exact phrase.
Side-note: I am not a financial planner, but I have an insanely good one. Happy to refer him out, I never would've learned these things at the age I did, if I didn't have someone like him guiding me.
Thanks for listening to my Ted talk, appreciate it. Would love feedback.
Cheers!
Good points @Steve Vaughan. Wise to do your conversions early so have many more years to grow tax free. No so for myself and many others who have left deferred income alone and have missed most of those tax free years by being older.
@Jared Trindade thanks for all the work you put into that post. I am thinking that RMD's aren't quite on your radar yet. So the question is about deferred income accounts like 401k's etc and whether it is best to wait as long as possible to pay the tax or withdraw early and pay the tax sooner decreasing future tax burdens. I agree there is much to consider. I deferred well into retirement and did not withdraw as early as I could have. Will wait for that down year.
- Real Estate Agent · Fayetteville, NC · Member since 2022 · 214 posts · 293 votes3y
Quote from @Jeff S.:
@Jared Trindade thanks for all the work you put into that post. I am thinking that RMD's aren't quite on your radar yet. So the question is about deferred income accounts like 401k's etc and whether it is best to wait as long as possible to pay the tax or withdraw early and pay the tax sooner decreasing future tax burdens. I agree there is much to consider. I deferred well into retirement and did not withdraw as early as I could have. Will wait for that down year.
I appreciate you giving me feedback on my post much appreciated. I am aware my post had literally nothing to do with the question at hand, plenty of people here already putting in their .02 cents regarding that. I hoped in sharing what I did, that anyone who comes here interested in discussing the main topic at hand, may also find value in reading what I offered as my goal is to share that info with as many people as I can. Most people simply don't think about those things when it comes to their future retirement, so it may be a value add for someone who is using forums like this to gain perspective.
Thanks again for your feedback! Hope everything goes well with your plan my good sir.
Cheers!
@Jared Trindade my experience is with my kind of people which is those who hated their work and thought about (not so much retirement) but a different type of life. These people worked their jobs and did RE as a second job nights and weekends grinding away for years. You could say they paid the price. I don't think any of them could point to a financial advisor as their source of success. We do employ accountant and attorneys. Financial advisors not so much.
- Real Estate Agent · Fayetteville, NC · Member since 2022 · 214 posts · 293 votes3y
Quote from @Jeff S.:
@Jared Trindade my experience is with my kind of people which is those who hated their work and thought about (not so much retirement) but a different type of life. These people worked their jobs and did RE as a second job nights and weekends grinding away for years. You could say they paid the price. I don't think any of them could point to a financial advisor as their source of success. We do employ accountant and attorneys. Financial advisors not so much.
I appreciate where you're coming from; this is the case for many people, and much respect to anyone who has achieved or begun to achieve their goals in this way. I however, personally view that as a missed opportunity for people. Accountants, attorneys all this is important, and can lead to success of course.
A good financial advisor/planner is protection, and understanding. It's a shame to work your entire life, making money, building wealth, and not protect that or understand the highest and best use of that capital. Many investors attach ego to their personal productivity, and leave little room for being challenged on their financial perspectives.
Someone can say their source of performance came from Accountants, other investors, mentors, attorneys, ect. - That means literally nothing to me if in 30 years when they go to retire with the plans in place, the protection in place and they haven't set themselves up to benefit from the hard work they did, and they lose it all/or most. If this was avoidable by planning better then where's the lack of value to that as a member of your team? An advisor helps you capture lost dollars, missed opportunities, and most importantly a complete understanding of what finances can bring to the table.A car accident that puts someone out of work, and leaves them on disability, can ruin someone's lifetime of wealth accumulation. IF they were not planning for something like this - just in case. Protection is always key.
I do not work with one of the standard 1.1m agents in the US who does your traditional financial planning. I use one of <10,000 agents who teach finances in very different way. I am not saying someone needs a financial advisor to be successful, or to retain their wealth. I am however saying, I think anyone who discounts the potential benefits of someone in that expertise field, because they have someone who can add with a calculator and save money on their taxes- is a missed opportunity.
To each their own, but understanding the fundamental value, and truths revolving money is not something my accountant cares if I understand. So long as I provide them work and compensation, and can realize the benefit of having one, I have one. But if you were offered a financial advisor who doesn't charge for time- only by products (and only if they are required) who would spend hours a year with you digging in on protection, understanding, and the truest costs of money- I don't think anyone in their right mind would say "I know all that, so no thanks." - Unless you've spent the last 60 years studying, practicing, working on those exact things- there's no way to get some of this information in the public without dedicating massive resources to learn and implement. Someone who can take the trial and error out of that, and prove with cold hard data that you are missing opportunities because you weren't aware of their existence is invaluable. I do think you will agree with me here on that.
Would love to hear your thoughts on that!
Cheers! Hey @Jared Trindade an advisor that sells products is exactly what I don't want. If I chose an advisor I would go with a fee only advisor that wasn't tied to a commission based program that is primarily sales based in nature.
I understand as most would that protecting yourself in various ways is important but a far as death insurance goes I choose to pass.
Insurance sales is a lucrative business if you are good at sales. Good luck with your promotions.
- Real Estate Agent · Fayetteville, NC · Member since 2022 · 214 posts · 293 votes3yI am no insurance agent, I am a real estate agent.
Quote from @Jeff S.:
Hey @Jared Trindade an advisor that sells products is exactly what I don't want. If I chose an advisor I would go with a fee only advisor that wasn't tied to a commission based program that is primarily sales based in nature.
I understand as most would that protecting yourself in various ways is important but a far as death insurance goes I choose to pass.
Insurance sales is a lucrative business if you are good at sales. Good luck with your promotions.
I am curious if you are aware of Indexed Whole Life Insurance? You may change your point of view on that, not just protection, but a tax deferred investment vehicle that earns interest.
Free information is super valuable, I wouldn't shrug it to the side. If you paid a fee advisor to give you the same info as someone that can give it for free, that honestly doesn't make much sense to me personally.
Everyone has their own opinion on what information sources they want to use, not trying to debate that, just offering an alternate perspective.
Cheers! @Jared Trindade tell what you think about the advice that instead of buying whole life you get the same insurance benefit with term and then you can invest in indexed funds yourself. If the insurance company is willing to take the risk why wouldn't you? After all they own some of the tallest buildings in the biggest cities. In the long run the house (insurance companies and casinos) always win.
- Insurance Agent · all 50 states · Member since 2022 · 184 posts · 122 votes3y
I would love to have a conversation around what is available for insurance... One of the big reasons that Insurance companies win is because they talk so many people into buying term insurance. Term insurance is like paying for a rental. I am not knocking term life because it totally has its place in the market and has does great things for many many many people. there are some cool things that can be done with term insurance such as "return of premium" which is if you keep your contract in good standing (pay your premium) during the term of the policy you can receive up to 100% of the premium you have paid back. so that would be a net 0 expense.
One side note on Life Insurance. 99% of all term life insurance never pays out the death benefit Conversely just over 85% of permanent life policies pay the death benefit. That 15% includes all the policies that get canceled due to non payment, or people that decide they want to shut down their policies, policies that implode because they were set up improperly, etc.
When you look at whole life insurance. Maybe the Cash Value policies aren't worthwhile for you. They do cost something, meaning they aren't free, and they require time, lots of time to build any amount of significant cash value in comparison to the premium invested, 20+ years. They are basically a high interest savings account that have some other added benefits. (taxes, divorce, bankruptcy, etc.)
Maybe you should be looking into something like a GUL guaranteed universal life. These policies have $0 cash value but are permanent life products, which means that as long as they are paid for no matter when you die your estate will receive the life insurance payout. Because these policies do not have any cash value the "cost" of the policy is much cheaper than the "cost" of Cash value policies.
MEC- Modified endowment contracts- Lots of people are scared of these because they loose some of their tax advantages, and there are lots of agents that set these up wrong and screw them up. But they can "pay back the costs" of the policy much faster than a regular cash value policy, and these can be purchased by a single payment. The "cash value" is available day 1 of the policy, and they offer all the stat protections of a standard life insurance policy.
Annuity- buy now and they provide income at an elevated level. set it and forget it.
Depending on your net worth and your annual income you may qualify for "Premium Finance" where you pay the interest only on a loan and a 3rd party bank pays the premium. after 5-10 years and the policy is completely paid for, you take some of the "cash value of the policy" to pay the loan back and then have substantial more cash value that you can leverage.
Life Insurance creates leverage. Life insurance can solve problems now in terms of protections and leverage, while at the same time providing more for our heirs.
Do I get paid for selling policies? Yes I do. I can't force anyone to sign on the line, and then continue to pay for their policy 10-20-30 years down the road? If the policy doesn't solve a problem the client isn't going to keep the policy. and if they don't keep the policy I have to pay back the commission that I got paid for selling the policy.
Life insurance is not an investment, it can be used to leverage your investments, and it is a very very very safe place to put your money.
Get with me anytime, I won't even charge you a flat rate to answer any questions that you have.
- Insurance Agent · all 50 states · Member since 2022 · 184 posts · 122 votes3y
I do want to answer my view of your original question.
I am invested in a plethora of ways, some qualified funds, some non qualified. I have real estate, both a traditional and roth, an annuity, an IUL MEC, I also dabble in Forex, and options. (very very little).
I don't actually ever plan on "retiring" in the traditional sense. More like just moving into other career types, maybe things that take less time, and are a lower stress level that what I am doing or have done in the past.
@Aaron Porter thanks for the explanation of some of the types of insurance.
Somehow this discussion turned into an insurance discussion. I have not worked a w2 for 12 years and am doing just fine. I am in the giving back stage not trying to form a plan to get to where I already am.
I would start a new thread to see how many agree with you about the benefits of whole life and some of these other programs. I do appreciate the work insurance sales takes and hopefully you find some good clients to sell to. I know there are many wealthy individuals that own lots of different types of insurance like those you refer to and some people suggest spending down all your assets and letting life insurance pay off heirs. That is not my comfort level.
My post is questioning the wisdom of putting huge amounts of capital into deferred accounts where one may be high income when RMDs kick in so that withdrawing funds is highly taxed.
- Insurance Agent · all 50 states · Member since 2022 · 184 posts · 122 votes3y
@Jeff S. I appreciate your response, both here and in other threads where I have read what you have to say. I love getting to discuss the merits and downfalls of ideas, options, strategies, and tangibles.
I apologize if your thread now gets bombarded with ins talk.
Is it wisdom if you don't have a clear knowledge or understanding of what is going to happen? Personally the deferred taxation portion of my portfolio is extremely small. There can be some benefits to deferring some of your tax liability, but from my lowly upbringing it has always been better for me to use after tax $$ to fund any investing I have been able to do. I have utilized both 1031 and 1035 to good outcomes.
I think that "my comfort level" is something that everyone should take seriously for themselves. Some peoples comfort levels are playing the lottery, trade multipliers, penny stocks, drugs-both legal and illegal, restaurants, etc. I have found my comfort zone is in tangibles, investing in business and people that create, build and distribute useable products and services. Some of these are less lucrative than more risky investments, but they are things that are in my comfort zone.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.