Speaker 1 0:02
As we step into 2025 following a tumultuous year shaped by geopolitical shifts, ongoing conflicts, and lingering questions about inflation, interest rates, immigration, and trade, the retirement investing landscape may feel overwhelming for many investors. Today on Retire Smart Maryland Radio will dig into different ways to help protect your retirement savings.
Announcer 0:27
Welcome in to Retire Smart Maryland Radio with Prashant Sabapathi.
Speaker 2 0:34
Welcome in to Retire Smart Maryland Radio, your host Prashant Sabapathi. He’s joined by John DeFeo today, and they’re both with the Elite Income Advisors. They’re headquartered to Ellicott City, and they have a satellite office in Annapolis for your convenience. Per shots, an independent fiduciary, he’s also a published author, a couple of books to his credit so far: Physical Health, Retirement Wealth, and Retire Abundantly. I’m Morgan Patrick, and each and every week it’s back and forth on the retirement topics, but it’s also, you know, the importance of having a plan and being ready for your retirement. There’s going to be an opportunity to get on the calendar with elite income advisors, and these appointments are complimentary. We’ll tell you about those as we move through the program. Hey, before we jump in to ways to protect your retirement savings with everything that’s going on, gentlemen, how was your week?
Speaker 1 1:23
Week’s been good, Morgan. Just busy, you know, like that. That’s good. It’s definitely good. It’s always funny. We kind of plan for the winter sometimes to be a little bit slower around the office, but I’ll tell you what, the last two winter seasons it feels like it’s gotten busier. I think people get serious about New Year’s resolutions, those types of things, get really serious about their financial planning. So, office has been busy, staff’s been busy, and that’s always good for us in our business.
Speaker 2 1:52
Yeah, and same here. I mean, staying busy, lots of clients coming in and out. Well, it’s a wonderful time of year, and you guys, you recently had a pretty big shindig a la politics in your area, and look, I mean, this is going to impact us in so many different ways, especially when it comes to your money. There’s going to be some ebb, there’s going to be some flow, you got to be prepared for it. So, how do you protect your retirement savings, and Prashant, we’ll start with you. Maybe invest and be more intelligent, have a better approach when it comes to your risk management.
Speaker 1 2:29
I think market volatility is always a pretty big concern for the average pre-retiree, especially the closer you get to retirement. I mean, of course, you don’t want to take on that big catastrophic loss right before you retire. If you go back to what happened in 2008 I mean, how many people do we know that either felt like they had to work longer and couldn’t retire because the market went down, or maybe they had just retired and felt like they needed to go back to work. And so I think we have to shift our focus, not just from growth, not just to focus on growth, I should say, but to focus on protection and risk management. So, whether it’s employing techniques like diversification or even active management of your investments, tactical asset allocation models, like a lot of different things you can do, I think it would behoove everyone who’s within 10 years of retirement to take a long hard look at their portfolio and figure out whether or not the risk capacity that they have matches the risk in their portfolio. If you’re not sure how to do that, this is an exercise that we take people through each and every day, and it’s all about how much risk are you taking? What is your maximum loss potential
Speaker 2 3:44
protecting your retirement savings? I mean, that’s what we talk about each and every week, and you got to have a plan. So, how do you go about it? So, where do you invest your money? Maybe you hedge against large equity losses per shot.
Speaker 1 3:59
Yeah, and hedging can mean a lot of different things. You can hedge a lot of different ways. You can hedge by using market-based investments that are non-correlated to the traditional assets in your portfolio. So, for example, a good example of this is going back to the oh eight scenario, was that the idea of diversifying using stocks and bonds, as opposed to just stocks. Now, of course, in 2022 when we use stocks and bonds, both of those asset classes took on a heck of a lot of risk. So, when we talk about diversification and hedging, it oftentimes includes a concept that we call bucketing, which you’ve heard me talk about on the show for what feels like years now, is this idea of having safe money and having risk money, and so if we want to have safe money, we should have money that is truly safe and secure, money that cannot lose, heaven forbid the market goes down. This is the idea of bucketing. A lot of times we’re using things like CDs, we’re using things like fixed indexed annuities to help hedge. Against market risk, while still being able to maintain a modest rate of return, so hedging is a big part of it, and you know there’s a lot of different things you can do, but that’s certainly one way that we talk about it, is bucking in your money.
Speaker 2 5:15
I mean, when you think about it, there’s so much going on, it’s going to impact you, it’s going to impact your money. So, how do you protect your retirement savings? You invest intelligently, you have a more significant approach to risk management. You also hedge against large equity losses. John DeFeo also joining us on the program with the Elite Income Advisors. The next one to you, John, and that’s just retirement longevity. I mean, we’re living longer, so you need to be intelligent about your wealth and how you use it.
Speaker 3 5:45
You’ve got that absolutely correct. I mean, we’re seeing clients facing 3040 year retirements these days, you know, in some scenarios, so that’s a bit of a long time to plan for. So, we’re, you know, typically able to help these clients achieve success through proper portfolio diversification and implementing appropriate financial strategies and tools that we’re able to use, and this typically involves maintaining a balance between conservative investments for income and stability and growth-oriented assets to keep up with inflation and those rising costs, right. So one of those strategies that Prashant just suggested is the bucketing approach that we do with clients, and we typically like to bucket money into an area where we’re ensuring their lifetime income needs are covered, and that’s in the stable income, and the other assets are for growth.
Speaker 2 6:35
So, important to remember, I mean, everybody is unique, you need a customized plan that is dedicated to what you need, what you need to do in retirement. We’re going over just ways to protect that nest egg, your retirement savings. And John, this next one, I mean, when you think about it, you don’t want to be a turtle, you don’t want to shrink away, you don’t want to totally disappear. I mean, you still need some exposure to risk to make sure you’re driving your returns.
Speaker 3 7:02
Absolutely, I mean, one of the hardest things to do is to convince an investor who’s been burned by the market in the past that they need to take risk to be successful, but this is absolutely the truth. And although we do implement strategies to solve the problem of lifetime income, we need to be cognizant of factors in the economy, like inflation, which riskier assets help to protect against, right? So, ensuring that you do have a well-diversified portfolio with exposure to a mix of asset classes, like stocks, bonds, commodities, et cetera, is essential to ensure that you’re capturing different market opportunities. Now, if you’re unsure what that diversified portfolio looks like, I encourage you to give us a call, come visit, because it’s going to look different for every single person. We can sit down, diagnose your goals, your needs, and let us dive into what that portfolio actually looks like for you.
Speaker 1 7:50
And I think Morgan, this comes back to this idea of having a written, concrete plan in place, like if your advisor hasn’t talked to you about bucketing your money or the importance of having safe money built into your retirement plan. It’s a great opportunity for you to pick up the phone and give us a call. Now, the phone number, folks, is 800-653-8404 That’s 800-653-8404 And when you dial that number, you’ll be able to schedule a complimentary visit with our team at Elite Income Advisors, so you come in, we’re going to get to know you, you’re going to get to know us, you’re going to ask as many questions that you have about your retirement plan. We’ll share some tools with you on how we’ve been able to help people plan for successful retirement. If we’re a good fit, we might find an opportunity to work together. Starts with that phone call, and Morgan, on the other side of the break, I want to do a quick case study to build on what John’s saying. So, let’s open up the phone lines: 800-653-8404 and come back.
Speaker 2 8:47
All right, I like it. And we’ll have that case study coming back on the other side. Call the number, grab an appointment now. They’re complimentary: 800-653-8404 More RetireSmart Maryland Radio coming up, you We are back on Retire Smart Maryland Radio. Your host, Prashant Sabapathi, and John DeFeo. You can find them at Elite Income Advisors. Check them out online, great resource website Elite Income advisors.com links to the TV show, radio shows in podcast form for shots, an independent fiduciary. They’re headquartered in Ellicott City Satellite Office in Annapolis. Again, I’m Morgan Patrick. Each and every week we go back and forth, and we ended the last segment again, just talking about things you need to be aware of to protect your nest egg in a very turbulent time, but we have a case study. Prashant, you wanted to highlight it.
Speaker 1 9:47
Yeah, just bringing these concepts together. You know, I had someone come in for a consultation recently to visit with me, and our team did a great job saving, so we had a doctor and then someone that worked for. A big news network, and basically, what we were dealing with was about $2.7 million in retirement accounts. Okay, and still a couple years away from retiring. And when they retired, what we determined is that in order to supplement their social security and federal pension, we needed to withdraw about $95,000 per year off of the 2.6 $2.7 million portfolio in order to meet their retirement income needs, and so their concern was, okay, that 2.7 million is all in the stock market, which means, hey, we have two good years like we saw in 23 and 24 2.7 could very reasonably become three or three and a half million dollars, and that would be fantastic, because taking $95,000 a year off a three and a half million is a really sustainable way to retire, but I think their number one concern was what happens if we retire and we go through the 08 market scenario, or more recently, if we go through the 2022 market scenario again, I don’t want 2.7 to become 1.9 and now taking $95,000 a year off of 1.9 hurts a lot more. It might still be enough to last them the rest of their lifetime, but it feels like we’re selling at a low point, and so one of the things that we were able to do is we recommended to them that of the 2.7 million, we take a million dollars and we move it to a safe bucket of money. Believe it or not, we actually utilized one of these no-fee fixed indexed annuity accounts. Now, I know what people are going to think, “Oh, annuity is the bad word in the industry, right, but here’s the thing. The types of annuities that we oftentimes use are ones that are ultra low in cost. In fact, the one that we recommended for them has no fees whatsoever, and it offers them 100% principal protection. So now they put a million dollars in. If the stock market crashes, they cannot lose a single solitary penny of their money now. When the market goes up, they’re still able to grow, and by doing that, what we’re allowed to do is when their risk money, the 1.7 million that’s still in the market, when that loses money, and inevitably it will at some point in time, we’re going to take the 100,000 or 95,000 of income that they need from their safe money bucket that has not lost, so that we can let the risk money recover, and so it’s not the highest growth way to retire, but it offers a heck of a lot more safety, a lot more certainty, and it gives you a safe place to take money from, and that’s how creating balance and protection, including balance and protection in your retirement plan can increase the certainty that you will not run out of money. Very cool scenario, and it really piggybacks on everything John was talking about that last segment.
Speaker 2 12:51
Yeah, I mean, when you think about it, there’s so many people out there like this couple that you know they’ve been saving their entire working life, and and probably a lot of what they have is at risk, so coming in and talking about it, and going over some different options about how you can protect what is going to be your nest egg, what you need for income in retirement, and then allow the rest, kind of like the turtle scenario we used earlier, you know, the turtle can still have its head out there in the market working for you, because you know you’ve got your, your, your principal right there, and it’s safe, that’s right, all right. So, again, we hit the retirement topics. You get an opportunity to come in and meet with elite income advisors, and these are no-cost appointments. There’s no obligation. Prashant says it all the time. You’re not agreeing to become a client of theirs, and they’re not agreeing to take you as a client. Let’s see if it’s a good fit. All you’ve got to do is call 800-653-8404 If you’ve got questions about your own portfolio, are you too much at risk? Do you even know, right? Call the number 800-653-8404 and if you’re in the middle of something, need a second opinion, one of the appointments, I mean, it is tailor-made for you, 800-653-8404 So, Psychologist Paul Ekman, he says there are six basic emotions, all right, six of them, and here they are: happiness, sadness, anger, fear, surprise, and disgust, and it can be tough to manage all of those right on a daily basis. A lot of us go through those, and especially when you’re trying to retire, think about that. So, we’re going to talk about each emotion and how you can leverage that for a better retirement. All right, so guess what, John, you’re up first, right? And this will be a combination. We’ll use Prashant as well, but this is the can of corn. This is over the plate. This is right in the middle. This is what we all want. That’s happiness,
Speaker 1 14:52
right? And I mean, I would assume most people getting ready to retire are pretty happy. I mean, I would hope so. You know, it really comes down to. Will making good decisions even when you are about to cross the finish line. Prashant, how do we leverage that happiness when we’re getting ready to retire and make those decisions? I think it’s all about positive feelings. You got to use your positivity as motivation to maintain good habits. I can’t tell you how many times we have people that get to retirement, they were so disciplined for 30 or 40 years, they were investing regularly, they were staying up to date on financial education, and then they get to retirement, and they just go way too crazy, you know what I mean, like start spending money at a rate that we never thought, and so you just got to be careful, okay? Even if you did a great job saving money, you need to be really careful that you’re not being irresponsible in putting that money at risk of running out one day, because that’s all you have to be able to take care of you when you get to retirement.
Speaker 2 15:52
Talking about emotions, I mean, you’ve got happiness, you’re maintaining the momentum in retirement, need to stay on top of that, and the opposite is sadness, gentlemen, and Prashant. I mean, sadness that can happen if you make a mistake, but you need to learn, and you need to move on.
Speaker 1 16:09
And sadness, I think I would wrap into that sadness category, regret and disappointments, right? So, look, we’re all going to make mistakes at certain points, we’re all going to have regret or disappointment with some of the decisions that we’ve made. I think what we have to do is we have to be able to identify in real time that we’ve made a mistake and make sure that we don’t make the same mistake again. One of the things I look for when I hire people to my firm is I know people are going to make mistakes. I just want people that don’t make the same mistake twice, right? And we were just talking about that when we were doing our prep, so you know, sadness is out there, disappointment, regret is out there. John, talk a little bit about, you know, clients that have made those mistakes. How do you manage that on an ongoing
Speaker 3 17:00
basis? Well, I think the first thing you have to do is acknowledge that you made a mistake, right, and, and really focus on what actionable changes you have moving forward, you know, maybe that’s ramping up your contributions, consolidating debts, seeking professional advice, you know, kind of stewing and living in that disappointment and sadness is the biggest mistake that clients make, rather than doing whatever you can to get out of that situation and make it better for yourself.
Speaker 2 17:27
Okay, again, I mean, you get into these emotions and you can see how it would play into your retirement. You need to be aware of them: happiness, sadness, and if you have – if you have the sadness and you’ve made a misstep, Prashant and John, I mean, anger is going to come, right? You’re going to be upset at yourself. How do you channel that kind of energy?
Speaker 3 17:49
Well, I mean, I also think of frustration when I think of anger, and you know, these can happen from things like a market downturn, right? Before you’re going to retire, maybe you had a goal of retiring in five years, but you’re laid off in three. These types of things show up time and time again, you know. No one has a crystal ball, nobody knows exactly what’s going to happen. So, you know, trying to channel that anger and do something positive with it is what we look for in these situations. And, you know, Prashant, if you’re angry, or, you know, we have angry clients, and they’re, you know, going through some of these situations. How do you typically suggest managing that for their financial plan?
Speaker 1 18:28
It comes back to frustration, right? You got to turn the frustration into something productive. Look, I think it’s natural to feel anxious or even angry sometimes when you watch the market go down, and you, you lose money, but look, we have to understand that investment loss is just a part of the process. I think the way that you deal with it is that you have to be constantly reviewing your investment portfolio. You’re looking for those things that may be creating higher points of risk. If you’ve never met with an advisor, it’s a great opportunity to just get a second opinion. It doesn’t necessarily mean that you have to do anything differently, but I always kind of, you know, I’ve shared my story for years on this show that I grew up in the medical community, right? Both my parents were doctors, my brother’s a doctor, my wife’s in orthopedics. I was always taught that when I have a medical issue, I want to go get a second opinion, and look, if I have a heart problem, I want to go see the best cardio doctor that’s out there, best cardiologist that’s out there to get a second opinion, and I might end up taking action, I might not, but I can make that decision a heck of a lot more in a more informed way, as long as I’m armed with the information I need to make a really good choice, so that’s how I would think about it. You got to be productive at the end of the day.
Speaker 2 19:45
I mean, just hitting the emotions and how they play into retirement planning. And the next one, Prashant, we’ll start with you. And this is the, this is the number one. People are scared to death, they’re going to run out of money in retirement. Fear,
Speaker 1 19:55
that’s exactly right. Running out of money is still the. Number one concern, but for retirees, but the way I look at it is it’s not really about running out of money, it’s about running out of income, right? If you think about it, when you retire, what do you lose? You lose the security of your paycheck, right, and that’s when unforeseen medical expenses, stock market crashes, those unplanned for events turn into fear and anxiety, and so John, talk a little bit for a second here, if you could, just about how to deal with the what if scenarios that we simply can’t plan for. How do we go about planning, helping our clients prepare for the what ifs.
Speaker 3 20:42
Well, we obviously have to build that scenario into the plan. We have to test the plan. We can’t just look at it from the best case scenario. We have to look at it from the worst case scenario and be more conservative, right? So, there’s plenty of opportunities where we’ve put in, you know, what happens if someone has a long term care need for a certain period of time, or what if somebody dies prematurely? How does that income affect their surviving spouse? So, these are all things that we throw into the plan to test it to ensure its success. And at the end of the day, you know, we’re really not sure what’s going to happen. No one has that crystal ball. So, having safeguards in place to reduce the likelihood of those things happening is, I think, the most important thing, and that all comes full circle in a good financial plan.
Speaker 1 21:27
It’s all about probability, I think. Exactly what you’re saying is that you want to increase the probability that your plan is successful, and you do that by mitigating risk. Okay, at the end of the day, good retirement advisors are managers of risk. It’s not about managing money or income, it’s about managing the risk that you will not run out. Folks, if you’ve not been through a risk management exercise and you’re within 10 years of retirement, pick up the phone and give us a call. We’ll help you stress test your retirement plan. That phone number is 800-653-8404 If you are at undue and unnecessary risk, wouldn’t you like to know about that five to 10 years before you get to retirement? If you haven’t been through that exercise, great opportunity to get a free consultation. Come on in and visit with the team. We’ll stress test your portfolio, let you know where you stand. 800-653-8404 We will be right back with more. Retire Smart Maryland Radio,
Speaker 2 22:37
Retire Smart Maryland Radio. Your host, Prashant Sabapathi, along with John DeFeo. You can find them both at Elite Income Advisors. They’re headquartered in Ellicott City Satellite Office in Annapolis for your convenience. Prashant is an independent fiduciary. He’s also a published author, a couple of books already to his credit: fiscal health, retirement, wealth, and retire abundantly. I’m Morgan Patrick. And each and every week, it’s always the importance of having a plan, being ready for retirement, being proactive as opposed to reactive. So, retirement guys is about more than just saving, it’s about planning, I mean, really every aspect of your financial life to help support the lifestyle that you want. That’s the key, right? Whether you’re tackling debt, maybe exploring investment options, preparing the estate for your loved ones a proactive approach is the cornerstone for success. So, in today’s portion of the program, let’s explore some pillars of financial planning for retirement, so you can feel confident, and we want our listeners to be confident and prepared for what is going to be this new chapter. So, I’m gonna ask the question, Prashant, you’re first up. What are the big four indicators of a strong retirement plan?
Speaker 1 23:49
Okay, so if I looked at all of the people that we’ve helped retire over the last decade, let’s say, I try to identify the common thread between the most successful retirees, and by the way, let me qualify to me, a successful retiree has nothing to do with how much money you have when you retire. Okay, to me success in retirement is how your retirement turned out relative to what your expectation of what retirement was supposed to be like. So, is our retirement better than expected, worse than expected, or exactly as expected. The ones that say their retirement was better than they had expected. These are the common things that I’ve found. Number one, those people tend to live within their means. Okay, that’s number one. They’re not spending outside of their means. Number two is they’re increasing their assets on an annual basis, on average, now certainly some years the market’s going to go down. That won’t be the case, but increasing your assets on average, I think, is a big deal. Number three is decreasing your reliance on debt. Okay, debt creates payments. Payments means your cash flow starts to be in jeopardy, so decreasing your reliance. On debt, and then the fourth thing is ensuring that your retirement cash flow covers your expenses without depleting assets, and to me that goes back to what I would call foundational income, that’s income that is not derived from market-based assets. In order to let the stock market grow your assets, you have to not take money out, and so if you can set yourself up with enough guaranteed foundational income, so that you don’t have to touch your market-based assets, that’s what really empowers you to be successful in the in some of the other big four indicators that we’ve talked about, and one thing you’ve heard me talk about is this idea of tracking cash flow, right? Because retirement is all about money in and money out at the end of the day. John, talk a little bit here about why tracking cash flow is an incredibly critical component to being successful in retirement. In retirement,
Speaker 3 26:00
yeah, I mean, what is more critical than knowing how much money you need to live comfortably and do the things that you want to do in retirement? I think without knowing that number, it’s nearly impossible to be successful. We generally recommend retirees have an idea of what their monthly income target is going to be a year prior to retirement, approximately, in order to test themselves leading up to that date. One way that we actually do this with clients is by playing a game, per se, where we live out of one bank account for, say, about a year. You start with an amount, call it $20,000 and then we check in with those clients every six months, and then at a year, and see what that balance has done, right? So, if that balance has increased, that means that they’re likely not spending what that target was. If the balance has gone down, that means they’re likely overspending, and if it stayed relatively the same, then we know that their expense projections were probably pretty accurate. So, looking into that and then continually revisiting the budget and making adjustments to help cut out that unnecessary spending is just one of those ways that we can do that for clients.
Speaker 2 27:04
We are talking about and breaking down just the essentials for a solid strategy when it comes to retirement, knowing the big four indicators, those pillars for a strong retirement plan, and then tracking cash flow. Absolutely crucial. Prashant, what about strategy? Just early investing, right? When you get into it early, having that strategy, which will lead to the outcomes you want.
Speaker 1 27:29
Look, we’ve talked about it for years. I think the number one driver of investment success is simply time, right? The longer you can invest your money without touching it, the higher the probability is that you’re going to earn a rate of return that you can feel good about on your investment. So, here’s an example: a 22 year old person who invests just $1,000 annually for nine years can actually surpass a 31 year old person who invests the same amount for 34 years isn’t that crazy. Nine years can surpass someone who saves the same amount for 34 years, and the only reason that is, is because they started nine years earlier, right? And so that really speaks to the idea of compounding interest, and I think what retirees can do is understand that in order to be successful, we got to go without touching our money, so we need time. The only problem is when we get to retirement, time is the one thing that we don’t have quite as much of, and so it becomes an exercise in planning where you have to use your money to buy yourself time, and we do that through bucketing, right? And we talk about this on every single show, and the reason we really talk about it is because it’s how we’ve been able to see our clients retire really successfully. Okay, it’s by bucketing their money, it’s by protecting their money, and it’s all about the income, people always ask me, why do we name the firm Elite Income Advisors, and that’s because retirement is all about income. It’s about creating that strong foundation.
Speaker 2 29:11
We’re talking about the essentials for that solid retirement plan, that solid retirement strategy. This next one, John, is huge. It’s kind of that I don’t even say it’s over in the corner lurking, I mean it’s a big black cloud for a lot of people, and that is, you know, not being financially ready for retirement because of the unsecured debt you have.
Speaker 3 29:33
Yeah, and I mean this is something that we talk with clients about just about every single meeting, because there are good bets and bad debts, and reducing high interest debt not only feels good for retirees, but it also prevents those unnecessary dollars from being paid to the bank in years that we really want to be maximizing their income to themselves. So, if we can send a client into retirement completely debt free, it reduces the amount of interest that’s being paid to the debtors and alleviates additional expense. And their income plan, and ultimately makes the retiree feel better, knowing that everything’s paid for, and they just need to supplement their current desired lifestyle. Now, with that being said, you know, we have clients that have purchased homes in the last year, or refinanced in the last few years, and they have very, very low interest rates, so we might have a different recommendation for them than someone that has a much higher interest debt on something else, so you know what this really means is that every client has their own objective, and some folks just want to pay the debt down as fast as possible. Some people are debt diverse, some people don’t mind it, but it really drills down to the importance of coming in, talking to us, seeing what works for your specific, specific plan, and putting that together for you,
Speaker 2 30:41
last but not least, and Prashant will let you hammer this out of the ballpark. I mean, so we’ve got the essentials down, we’ve been talking about those. What is the last thing, the last thing that kind of put the bow on this when it comes to maybe your legacy?
Speaker 1 30:55
I think that is the key word, is legacy. Okay, what do you want your legacy to look like both personally and financially, right. And so, when we look at the financial side of legacy, we got to talk about where’s our money going to go when we ultimately pass away. Do we want it to go to heirs? Do we want it to go to charitable organizations? That’ll be up to you. And then implementing a plan that allows your wishes to be executed according to your original kind of feelings on that, so that’s where we get into the world of wills and trusts and medical directives, powers of attorney to ensure that your wishes are honored and that your assets are distributed efficiently with the least amount of tax possible that is owed when the beneficiaries get what they’re supposed to get. Interesting statistic, 78% of adults need long term care at some point in their lifetime. Okay, my mom went through that as well. Eight years, she was diagnosed with dementia. We’re spending $12,000 per month just to take care of her in the house, and you think about how that can so quickly erode your retirement savings. Now we have to plan for if we go through that long-term care event, what is our financial legacy going to end up being? Okay, folks, you have to think about this in a comprehensive way. If you’ve not put together a plan that not only takes into account your social security, your retirement income, your income tax rate, or your legacy plan. It’s a great opportunity, especially to kick off the year to get your mind wrapped around this stuff and start today. The phone number is 800-653-8404 that’s 800-653-8404 Interesting resource website we put out there, it’s called Test mytaxbill.com If you’ve not looked into what your retirement taxes on your IRAs and 401 ks may look like, visit Test mytaxbill.com It’s a tax calculator you’ll be able to play around with, go check it out, and then come on in, talk with us about it. It’s 800-653-8404 Call the number, visit Test My Tax bill.com We are coming down the stretch on Retire Smart Maryland Radio. When we return, it’s time for scenarios. I’ll throw them at the fellas, we’ll see what they come up with. It’s all next on Retire Smart Maryland Radio,
Speaker 2 33:33
Retire Smart, Maryland Radio. Your hosts are Prashant Sabapathi and John DeFail, Elite Income Advisors. Where you can find them, check them out online. Great resource website, Elite Income advisors.com It’s easy to remember, rolls off the tongue, Elite Income advisors.com And again, great resource for you. Prashant is an independent fiduciary. They’re headquartered in Ellicott City. They have a satellite office in Annapolis for your convenience. I’m Morgan Patrick, and we get into retirement topics. You have questions about your own situation. Maybe you haven’t started planning, but you’re sitting on that nice fat portfolio and need something done, right? You can’t just show up. There’s so much show up at retirement, there’s so much to be done, so many puzzle pieces you need to have in order, so you have that retirement picture you’ve always wanted, or you’re halfway down the path, you’re frustrated, maybe your call’s not being returned, maybe your appointment’s getting moved around. It’s okay, you can grab a second opinion. Again, the number to call at any time during the show: 800-653-8404 That’s 800-653-8404 All right, it’s time for scenarios. John, we’ll start with you. 50-two year old, 300,000 in a 401k wants to retire early and is considering using a series of substantially equal periodic payments, SEP, to avoid early withdrawal penalties. What are the benefits and potential pitfalls of the SEP strategy?
Speaker 3 35:00
Yeah, so another term for this would be what’s called Rule 70 2t and it is a strategy within an individual retirement account that someone can utilize to start distributions prior to the age of 59 and a half and avoid the 10% penalty. Now, this is not permitted in qualified plans like a 401 K, so this client in particular would have to weigh the options of rolling over into their own IRA, and then from there they would set up substantially equal periodic payments over a period of either five years or until they reach 59 and a half, whichever is longer. So in this client’s case they would have to actually take those distributions for seven and a half years prior to meeting that that timeframe, now the advantages again are that you avoid the 10% early withdrawal penalty. You know, typically if you take money from a retirement plan fired for 59 and a half, you have a 10% penalty. So this would waive that, but it does come with some restrictions and downsize, right? So if within that period, so this client has seven and a half years, if they were to adjust those distributions each and every year, they would actually have to pay the penalty that they were avoiding, plus interest. So, even at the end of that seven years, if they were, you know, they had one payment left and they didn’t take it, or that was more than it was supposed to be at that point in time, they’d be assessed all of those penalties plus interest. So, it’s a great strategy for some folks, I’ve helped clients with it in the past, but you have to be very careful of the consequences that will come with that.
Speaker 2 36:26
We are in the Morgan, Morgan, Morgan, real quick,
Speaker 1 36:30
real quick. That was complicated as ever. What John just said. This is why I love having this guy on the team, man. This guy knows stuff that is so little used, but can be so incredibly valuable if you’re in this type of situation. I can tell you, okay, I’ve been doing this a long time, and we manage a ton of money at the firm. We’ve brokered a ton of annuities at the firm. I don’t know that I’ve really ever used that strategy that John was just talking about, and so how valuable to work with an advisor that knows the ins and outs of that, because you’re talking about whatever he just said, about, you know, we got to go seven and a half years, and if you don’t take the last payment, like, I didn’t know that. Okay, this is why I like having a team, and I think that it speaks to a bigger thing, like, in all seriousness, obviously John’s really good at what he does, but in all seriousness, I think this comes back to having a team in place, right? You don’t want to have just one advisor. What happens if something happens to your advisor? People ask me that all the time. What happens if Prashant go gets hit by a sleeve in the office? Right, not
Speaker 2 37:38
say that out loud, that’s not funny.
Speaker 1 37:40
But look, it’s reality at the end of the day. You should have a team of professionals, not just one, but a team of professionals that can help you through your retirement planning process, because not only does it give you some continuity, it gives you alternate perspectives, like what John just talked about. I don’t know that I would have thought of that if I was dealing with this 52 year old client, whereas he offers an alternate perspective that you know gives you options. I think, and that’s so important when you’re going through your plan. You want to have flexibility, you want to have options built in.
Speaker 2 38:10
Well, and again, I mean, it’s almost like you work with a firm, it’s like you’re getting a think tank, right? There’s so many things that can happen in the course of, you know, planning for retirement and having those kind of options, having those different pathways to get you to your goals, that’s what planning is all about. All right, the next one will also throw this one at John, and again, this is a TSP participant, 250,000 in their TSP, is considering taking a hardship withdrawal due to financial strain, but worries about long-term impact on their retirement savings. What are the withdrawal rules for hardship, and what alternatives might they consider before reducing their balance? Here,
Speaker 3 38:52
right, so with a hardship withdrawal from a qualified plan, there has to be some sort of qualifying financial need. There’s a list of these that you can find, you know, online, but I would also check with your plant administrator, because typically they’re the ones that are going to be the gatekeepers if they allow for them, but these can be things like, you know, unpaid medical bills, an eviction notice, you know, educational expenses that are coming due for you or a family member, so all of these are reasons you could potentially take a hardship, but you need to be aware of the consequences of doing so. Number one, you’re going to be subject to income tax on whatever distribution you take out, so the IRS will allow you to take money out of your plan early, but they don’t forgive you on the tax side. If you’re still under the age of 59 and a half, you’re still subject to a 10% penalty, so they can penalize you on top of the income taxes. So all of this, you know, builds into taking money out of your plan. The less money that you have to grow ultimately affects your, your retirement plan down the road. So, those are all things to think about, you know. If you do have some sort of a financial hardship and you’re still working, there are other options, such as taking a loan from your, your 401 k, so you can actually. Borrow your own money up to a certain point, pay yourself back with interest, that can be an issue if you have cash flow problems. So it is an option, but not always the solution. And then, if you’re making contributions to that plan, certainly just pausing contributions until your cash flow needs corrected is another way to remedy the problem, but those are certainly what we’re looking at.
Speaker 1 40:21
Hey, I was looking back at the COVID years, right, when so many people were unemployed, and the government gave us all these different hardship benefits that we could harvest. And one thing that happened, I had a business owner client in 2020 where the business showed a huge loss in 2020 and that passed through to her individual tax return. So, one of the cool things we were able to do in that year is we took a bunch of her IRA money, which was totally taxable, and we converted it to a Roth, and because some of the business income passed through to her, the business loss passed through to her individual tax return, she was actually able to convert nearly $100,000 to a Roth IRA, which now grows tax free for her, and she was able to do that without paying any taxes. Okay, so this is a case where, yeah, if it’s a hardship and it’s a true hardship, what John said makes a lot of sense, but if you’re a business owner and you have a business that maybe shows a loss in any given year. Have you talked with your tax advisor about how to take that loss and turn it into something that could be tremendously beneficial for your retirement by doing something like a Roth conversion? I think this is the side of financial planning that both tax advisors and financial advisors don’t work together enough. On look, if you’re a business owner, you should be taking advantage of different strategies that the average W-2 employee cannot take advantage of. You need to give us a call, especially if you own a business. 800-653-8404
Speaker 2 41:57
Retire Smart Maryland Radio. Again, Prashant Sabapathi and John DeFeo, your hosts. We are in the middle of scenarios, and again, these happen all over the country, and there might be a scenario in here that’s similar to what you’re going through. Just remember, it’s not exactly what you’re going through. There’s a lot that’s going to impact you as you move to your retirement. So, make sure you have a customized plan, the opportunity again to get on the calendar with elite income advisors ongoing during the course of this show, call the number 800-653-8404 These are complimentary appointments. All right, next scenario is this one, maybe our final one. A retiree, and this will go to you, Prashant, a retiree who receives Social Security and pension income wants to know if they should continue to withhold federal taxes to avoid a large tax bill. What is the best way to do that estimate when you’re talking about their withholding needs?
Speaker 1 42:52
Of course, taxes is a huge part of anyone’s retirement income plan. You want to withhold the right amount. This is why it’s so important to work with a good tax professional, but I think I go back to this idea of tax preparation versus tax planning. Right, a lot of times people think that their tax preparer is a tax planner, and I think that’s a huge mistake. So, tax preparers, just looking at your income in the current year and filing your taxes to make sure that you’re in compliance with IRS regulations for tax filing. A tax planner is trying to be proactive about it, looking 357, 10 years into the future to determine what your future tax liability could look like, so when I see someone that has social security and pension, I think you got to look at every other part of the financial situation to determine how much tax should be withheld. For example, is there a required minimum distribution that needs to come out? How will that RMD impact the client’s Medicare premiums? Right, because remember, Medicare is based on your income from two years ago, so a lot of different considerations here. Should we be taking advantage of something like a Roth conversion to reduce your future tax liability? I think if your advisor, your financial advisor, or your tax professional are not answering these questions for you, it’s something to take a look at. I think he might be missing the mark here, and it could be a red flag that you might not be working with the right specialist, and it doesn’t mean that the advisor that you have is, you know, not well-intentioned. It could just be that they’re not a specialist for this phase of life, folks. If you don’t know whether you are properly situated for retirement, are you not sure if the person you’re working with is a specialist in exactly what you need at this phase of life, the distribution phase? Pick up the phone and give us a call. Be the last opportunity to dial in and secure your appointment with us here at Elite Income Advisors 800-650-3840 04 When you come in to visit, it is totally free of cost. There’s absolutely no obligation to do business with us at any point in the process. If you feel like my team is not a good fit for you, you can be upfront about that, and we will be happy to go our separate ways. We’re not here to pressure or rush anybody into anything. It’s 800-653-8404 Come look at your future tax bill, your social security optimization, the risk in your portfolio, most importantly, your lifetime income plan.
Speaker 2 45:28
Retire Smart Maryland Radio. Another episode in the books for Prashant Sabapathi and John DeFeo. I’m Morgan Patrick. We’ll see on the radio next week, you The
Announcer 45:48
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