Speaker 1 0:01
The markets move fast, and headlines move even faster, and retirement doesn’t get a do-over. Today on Retire Smart Maryland Radio, we’re breaking down why sentiment and timing matter more than ever, and how smart retirees protect their income before volatility turns real.
Speaker 2 0:24
Welcome in to Retire Smart Maryland Radio with Prashant Sabapathi. Welcome in to Retire Smart Maryland Radio, your host Prashant Sabapathi and John DeFeo. You can find them at Elite Income Advisors, they’re independent fiduciaries, and it’s all about getting you ready for retirement, having a plan, being proactive. They’re headquartered to Ellicott City, and they placed a satellite office in Annapolis for your convenience. And all day today on this particular show, retiremaryland.com that’s the website to remember, retiremaryland.com We’ve got a free copy of Prashant’s book, Fiscal Health Retirement Wealth. Go to the website, sign up for it. They’ll send it out to you, absolutely free, complimentary, I should say. And it’s all about getting you ready for your retirement again. A free copy of Fiscal Health Retirement Wealth, retire maryland.com Gentlemen, before we dive in on safe money and retirement reality, that’s our first topic. Prashant, how was the week?
Speaker 1 1:22
Hey, Morgan, good to be back. The week has been really good, you know. We have been very busy to kick off the new year. It’s always exciting to hit the ground running. I think there’s a ton of planning opportunities, and of course, a lot going on around the world, both in markets. You know, we’ve been talking for the better part of a year now about tariffs, so looks like that’s coming back into the limelight here, as well as the Federal Reserve, and of course proactive tax planning opportunities, which I feel like we say every single time we do this show. So it’s been a hot start to the year, a lot of activity around the office, and I think that’s really exciting for us as advisors to bring a fresh perspective to everything going on with retirees’ plan, so it’s been exciting.
Speaker 2 2:10
All right, John, over to you. What about your week?
Speaker 2 2:13
It’s been great, you know. We’ve had some not pleasant weather by the time of this airing, you know, and even with that being said, we’ve been getting out and doing a lot of workshops, even aside from the snow, the ice, the cold, and we’ve had great attendance, which again is a bit surprising, considering the weather that we’ve had, but it’s been great. We’ve been meeting a lot of new folks that are looking for help with their retirement planning. We’re starting off the year with our existing clients and gearing them up for what our expectations are, so you know the beginning of the year is always busy, but we say this all the time. If it’s busy, that means it’s probably a good week.
Speaker 2 2:51
Well, and we say this all the time. I mean, if there’s chaos, if there’s uncertainty, people are out there and they’re concerned about their money, and we know that a lot of you are just sitting on portfolios, and hoping. Hope is not a plan. You really need to sit down and map out what you’re going to do for retirement, and now is the best time to do it. We’re going to give you an opportunity for a complimentary appointment. Again, Elite Income Advisors, stay tuned for that. All right, our first topic, guys, is just bond funds, safe money, and retirement reality, and why this matters so much to retirees. Prashant, yeah, I think when we look back at
Speaker 1 3:30
the traditional portfolios and we think about how retirees traditionally, quote unquote, should be allocated, you know we’re kind of thought to put part of our money in stocks, part of our money in bonds, with the idea being that the bond piece of the portfolio ends up being the quote unquote safer piece of the portfolio. I think one thing that’s really interesting is the fact that bond funds really have not performed, especially through recent financial turmoil that we saw in 2022 but these bond funds have not offered in a lot of cases the safety that we as investors expect them to, and I thought that’s really interesting, because we saw a bunch of people who had bonds, they came into our office, we saw the market go, the stock market and the bond market go down in 2022 We’ve since seen the stock market recover to all time highs in 2026 but bond prices have not rebounded with stocks, and so we’ve actually seen a very unique phenomenon where the more quote unquote conservative investor has actually not recovered off of the 2022 crisis, the inflation crisis, and I think a lot of that has to do with the instability in the bond market, and I think it’s something that retirees have to take a long hard look at as to whether or not using bonds as a uh. Safe haven is the right move moving forward. I think it’s really interesting. We haven’t seen a phenomenon like this in quite some time in America, but I think what happened in 2022 could very well be the impetus for people to start shifting the way that they think about portfolio construction and moving potentially away from bonds, because maybe, just maybe they’re not quite as safe as we originally thought that they would be. I mean, it’s
Speaker 2 5:26
worth it’s worth that conversation. John, your thoughts?
Speaker 2 5:28
Well, and I completely agree. I mean, in 2022 we saw the ETF for the 20 year treasury bond, that’s TLT down 26% in 2022 and the S and p5 100 index was down about 19% so we actually saw that 20 year treasury price drop more than the stock market, and as Prashant just mentioned, the stock market’s recovered, it’s at all-time highs, the bond market has not, and a part of that is because interest rates have stayed elevated much longer than I think anticipated, and until these interest rates come down, you know, we’re likely to see this issue of bonds not recovering to their high value, and as Prashant mentioned, these folks that were much more conservative in terms of bond funds are not seeing their accounts recover in the way that folks that have stock exposure would have, so you know, it could mean that if you were in a primarily bond portfolio right before retirement in 2022 maybe you extended that a little bit further. You know, I remember specifically during that year, you know, clients coming into us, as Prashant said, we’re in a, you know, a 6040 split of stocks to bonds, and they said my current advisor promised me that this portfolio would not lose more than 10 12% in any given year because of the inverse relationship of these two types of investments, and their accounts were down, you know, 17 18% because of the combination of losses. So I think having a discussion with folks about the risks that bond funds carry, as well as where they are applicable, where it does make sense to hold them, is very important. When we put together any financial plan and set expectations on what to expect from the performance of those investments,
Speaker 2 7:11
we are about to open up our appointments. They are complimentary, that is coming up. But Prashant, just, you know, before we do that, just give us the core point we’re trying to hit, we’re trying to get across to our listeners about bonds, about safe money, and about retirement reality.
Speaker 1 7:27
When it comes to your portfolio, if you’re holding a large position in bonds with the intention of being quote unquote conservative, because you’re getting closer to retirement, or maybe you’re already in retirement, all we’re saying is that it’s worth taking a second look to truly understand how much risk you’re taking, because that portfolio might not be as low risk as you had hoped when you originally set it up. For decades, bonds were treated like the shock absorbers of a retirement portfolio, where you didn’t expect excitement, you expected stability, but 2022 showed us something important, and that is that bonds don’t always protect you totally from volatility, they just shift what kind of volatility you’ve experienced in any given point in time, so if you’ve been relying on bonds or bond funds as the safe, steady part of your retirement plan. This is exactly the right moment to just take a second look and potentially reassess your position. I’m going to make available to every listener today a free copy of my book, it’s Fiscal Health Retirement Wealth. It’s your prescription for income generation, tax management, financial peace of mind. There’s a chapter in the book about the risk associated with investing. Visit Retire maryland.com that is Retire maryland.com Inside, you can claim your free copy of the book. I explain why traditional assumptions about safety, especially with things like bonds, can potentially fall short in retirement, and what alternatives exist instead. So, just visit Retire maryland.com get a free copy of my book, Fiscal Health, Retirement Wealth, and let’s get you on track to make sure that you’re planning for your most fulfilling version of retirement.
Speaker 2 9:20
When we return on Retire Smart Maryland Radio, we have a strategy of the week. You don’t want to miss it. It’s all coming up next. Welcome back into Retire Smart Maryland Radio, hosted by Prashant Sabapathi and John DeFeo. You can find them at Elite Income Advisors, they’re independent fiduciaries. And again, it’s all about getting you ready for retirement, headquartered in Ellicott City, and they have a satellite office in Annapolis for your convenience. I’m Morgan Patrick. A pleasure to jump on. And we are now at our point for strategy of the week, guys, redefining stability in retirement.
Speaker 2 10:07
Yeah, and I think that the strategy this week is how we look at bonds for safety instead look at structure as safety in your retirement plan, and what does that mean? Right, we talked about in the first segment that the bond portion of your portfolio has historically been seen as the cushion, right, the more defensive position in your investment portfolio, so that when the stock market is not performing well, your bond should theoretically do, you know, somewhat okay in terms of staying at least stable and not losing value, so it was where you would potentially take income from when the stock market was down, it gave you some, you know, some leverage in that capacity, but if we just discussed that even in a year like 2022 they were down 20 to 25% How do we actually find safety in an investment tool like that? We talk about very, very frequently the idea of bucketing, right, and I think that was the premise behind bonds in the first place, is you have a portion of your assets that are growth oriented and a portion that are income focused, and we still subscribe to that philosophy, we just do it a little bit differently, so you know, we want to be able to have assets that are for long term growth that are in the stock market that are trending upwards over time, although there are going to be bad years in between. We know that historically the stock market always moves north, and we still expect it to over time, but finding a way to structure the safety and the portfolio with something that are not bond funds, that there is no volatility associated with it. One of the ways that we do that for the clients that need income in our office are through different types of annuities, we use fixed annuities, fixed indexed annuities, where there is no possibility of losing value on your principal through the stock market. You also can participate in market like gains, which gives you a little bit more growth potential, but at the end of the day, there is no ability to lose value, and that’s what’s most important when you’re retired and starting to take money out of your accounts, because when we talk about success in the stock market, what do we always say the number one driver of success is?
Speaker 1 12:17
It’s time,
Speaker 2 12:17
right? It’s time, that’s exactly right. And what’s the one thing that retirees don’t have as much of it’s design time, right. So, if we could find a way to limit having to take distributions when there’s not time for that asset to recover, that’s the best way to do it. You’re not jeopardizing your sequence of returns, you’re not jeopardizing your assets over time. Then, again, a great way that we can do that are through some of these fixed annuities and fixed indexed annuities that are meant to provide stability and income,
Speaker 1 12:46
so why is it, John? Because you hear the word annuity, and for better or for worse, people associate annuity with something. Some people, a lot of people, a lot of our clients love the annuities that they have. Some people listening to this might say I never want to do an annuity ever, because I heard on the radio or I heard from somebody else that annuities are never a good option. It sounds like in the annuity that you’re describing, you cannot lose money due to the market going down, so it gives you total principal protection. It has the ability to go up if the market goes up, although you know it probably means you’re not going to go up all the way, that would of course be too good to be true. If I have upside with no downside, why are so many people against the use of annuities? Why do I hear all the time that you should never do an annuity as a part of your portfolio if what you’re saying is true, which I know that it is, because we’ve done a ton of these for clients, and of course it’s got to be the right fit for any individual person. Why do you think so many advisors and so many clients are against the use of tools like an annuity?
Speaker 2 14:04
It’s a great question, and it’s something that you know that still kind of baffles me to this day. I think there was a negative connotation towards annuities over the recent decade because of the older style annuities that were out there that were being pushed on consumers, but these were annuities that you sacrificed your principal, so you’re handing over a lump sum of money to an annuity company for an exchange in payments, though if you pass away early on, you don’t have the ability for that to be passed on to your beneficiaries, so that’s not ideal. There were really high fees inside of these annuities that were hidden, they weren’t being promoted in the correct fashion, they weren’t being explained correctly. I think some advisors were using these as growth vehicles when they should never be designed as a primary growth vehicle. So, I think it’s the explanations, the connotations, and also what’s in it for some advisors. You know, you know, it’s actually interesting. I just had a client that came in this morning that we did one of these fixed index annuities for. It’s going to provide her and her husband with close to $80,000 per year of guaranteed income while one of them is alive. So, as long as one of them continues living, they’re always going to receive that payment, even if the amount that they funded this with runs out and we’re sitting down today for a review meeting, and she goes, “Hey, John, you know, my nephew just got into the business, into the financial, you know, the financial advisory business, and I told him about our retirement strategy, strategy with the annuity, and he kind of made that cringe face, where, oh man, you know, what did you do? And she’s like, “Why would he say that? What are people’s negative reactions to annuities, and you know, I asked her her opinion. I was like, well, why do you think they would have that negative image on something that’s providing you with so much financial stability? And she said, well, maybe it has to do with their fee structure, maybe it has to do with the objectives that they have within their own firm, and I couldn’t agree more. I’m not going to name the firm that the individual is working for, but their primary client base are younger growth-based clients, so they don’t have the same need for protection of their savings that they put so much time and effort building to turn that into an income stream. So, it all comes down to the type of client that you’re working with, the needs of those clients, and look, we’re not out here saying that every single person should invest into an annuity. There are plenty of people out there that it really doesn’t make sense for, and we’ll tell you that very honestly, but there are other folks that can’t stomach the market volatility, whether it’s their own personal preference or their plan literally cannot withstand large market losses over an extended period of time, while they’re taking money out. Those are the candidates that I think really work well with annuities. So, it really is about perspective. I know that every client that we’ve worked with, that it has made sense to invest in an annuity, has absolutely loved the strategy. They love what it does for them, and we continue to go in the best direction for our clients, whether you know it’s a, you know, a fee-based conversation or not.
Speaker 2 17:08
It’s important to remember everybody is different. You guys have said that already today on the show a number of times, and the annuity that particular product kind of has garnered this reputation over years and years and years that simply isn’t warranted now. There’s so many different types of annuities, and if you’re working with fiduciary, fiduciary firm, and you sit down and you take a look at all these different puzzle pieces, there might be a possibility of an annuity being a good fit for what you want to do, but it takes that conversation, and that’s what we do here on the radio. We talk about it, you have questions, and you get to elite income advisors, and you get those questions answered. And again, there’s no cost or obligation to the appointments we do open up through the radio show. Today, we are focusing in on Prashant’s book, Fiscal Health, Retirement, Wealth. We’re giving away copies of that, but if you’ve got questions about, you know, your plan or lack thereof, grab one of our appointments. They’re available at any time during the show. 800-653-8404 That’s 800-653-8404 Or you can also go to our website again, that’s Retire maryland.com and sign up for Prashant’s book, Physical Health, Retirement, Wealth, and they will ship that out to you, that is complimentary. So, guys, let’s, let’s wrap up the conversation just on redefining stability in retirement. Prashant,
Speaker 1 18:31
I think stability in retirement comes from planning, not from assumptions, right? I kind of go back to an analogy that you know I’ve definitely used in the past here, and that’s really this idea of, you know, making sure that one major event doesn’t jeopardize your overall retirement plan, okay, so whether it’s a headlines of tariffs, whether it is the threat of taxes, or you know, we saw health care subsidies go away to start 2026 you don’t want to let those things impact your retirement plan. So the analogy I’ve kind of used is the market and Washington DC, a lot of that is like the weather, right? You can study the forecast, you can understand the patterns, you can know what season we’re in, but a storm can still roll in fast at any given point in time, and that storm, kind of like the one that we’ve just been through here in Maryland, that has a tangible effect on how you have to live your life in the short term, and I think that gets amplified when you get to retirement, because losses ultimately hurt you more than gains help you the closer you get to retirement. I mean, I’ve sat down with people who’ve saved $1,000,000.02 million dollars. And I asked them, how much could you lose of your $2 million before you start to feel uncomfortable about your retirement plan. Some people will look me dead in the eye and say, I can’t lose any of it. I worked really hard to accumulate that 2 million. Some people will say I’m comfortable with a 15% level of loss. Whatever your number is, you should create a plan that allows your portfolio to operate within that loss potential limit that you want to be at. Maybe an annuity is the right fit for you to help you down that journey. Maybe it’s not. Okay, we don’t pre-commit to anything here, but what I think it starts with is just a conversation, so we’ll do two things right now. We’ll open up the phone lines. The phone number is 800-653-8404 If you dial that phone number right now, we have our team of operators standing by. They will help you book a strategy session with our team of advisors at Elite Income. When you come in to visit with us, it is just a conversation to understand where you’re at in your planning journey and what options may be available for you to help get you on track, or make sure that you stay on track if you already are on track. So you can dial that phone number, 800-653-8404 We have offices in Ellicott City, Maryland, as well as Annapolis. When you come in to visit, it is totally 100% free of cost. You’re not agreeing to become a client, you’re not agreeing to pay us anything. It is just a conversation. If you’re not sure just yet whether or not you want to come in for that visit, that is totally fine. I’ll simply direct you to Retire maryland.com that is Retire maryland.com You’ll fill out a small questionnaire, it’s about five questions, and you’ll be able to get a free, totally free copy of Fiscal Health Retirement Wealth. That’s my book. I’ll even cover the shipping costs and sending it out to you. It’s totally free. You can give the book a read, and whenever you’re ready, if you want to talk about your situation, you can schedule that free consultation with us again. Retire maryland.com claim your free copy of Fiscal Health Retirement Wealth.
Speaker 2 22:11
All right, a couple things you can do there. Again, grab an appointment by calling 800-653-8404 come in and talk about your retirement situation, maybe you’re just sitting on the portfolio, or if you want that free book, and they’ll ship it out to you. Just go to Retire maryland.com and fill out a few questions, and they will send that out to your complimentary book, Fiscal Health Retirement Wealth. When we return on Retire Smart Maryland Radio, it is time for a scenario. Don’t go anywhere, you Retire Smart Maryland radio hosted by Prashant Sabapathi and John DeFeo, both of elite income advisors, they’re independent fiduciaries, they’re headquartered Ellicott City Satellite Office in Annapolis, and again, it’s all about being proactive, having a plan for retirement, and sitting on a portfolio. Guess what, you’ve done the heavy lifting, you’ve saved well. Now the planning really needs to start, or you’re halfway down that path, and you’re in desperate need of that second opinion. We’ll talk about how you can get those as we move through this portion of the show, but it’s time for a scenario, and John, you’ve got one for us.
Speaker 2 23:25
Yeah, so this is a couple that’s in their early ‘s. They’ve recently retired, and I think, like a lot of people, they’ve relied heavily on bond funds for the stability in their retirement income, right? So when the markets declined in 2022 and both stocks and bonds, and their portfolio loss value, those losses hit them a lot harder than they expected. Years later, the portion of the portfolio that was in bonds still hasn’t recovered, just as Prashant talked about earlier on. So, as they began taking withdrawals from that piece, they realized that those losses weren’t just temporary losses on paper anymore, they were actually being locked in as they created income, so that’s when their questions shifted. Why hasn’t this bounced back the way that we thought it would? Can our income still be reliable on this asset that’s that’s falling? And what happens if interest rates actually stay higher for longer in this type of an account, what options do I have at this point in time? Prashant,
Speaker 1 24:25
I think it comes back to something you just mentioned, which is their income, right? If you think about what drives any retiree’s lifestyle, it’s having a monthly income that’s coming in, and so where is that income actually going to come from? Is it going to come from social security? Is it going to come from a pension? If you’ve been fortunate enough to earn a pension, is it going to come from your 401 k or your tsp? And so, why do people fear losing money in retirement? It’s not just because they can’t stand to see the balance. Go down, it’s because they feel that if the balance goes down and they start withdrawing, it puts them at undue risk of running out. Right, retirees’ number one concern in this day and age is still running out of money, and so this is a scenario that really speaks to that fear of running out of money, and so one thing that we’ve talked about for years is let’s design a target income in retirement. Tell me, how much income you’re going to need coming in after taxes in order for you to live your most fulfilling version of life. Some people have told me that number’s 4000 a month. I’ve met with people that say 8000 a month. I met with somebody the other day, said $25,000 a month is what I need in order to feel really comfortable retiring. Look, your number is personal, there’s no right or wrong to it, but what you should do is you should work backwards. You should begin with the end in mind. Let’s say that your target income in retirement needs to be $10,000 per month in order for you to live a fulfilling lifestyle. Let’s design a plan that coordinates your income to ensure that you will always have that 10,000 Let’s say social security in your pension makes up 6500 of the 10,000 that means that you have a gap of $3,500 per month. How much of your portfolio do we need to dedicate to something that is going to provide us the $3,500 per month? And by the way, if you knew that you always had the 3500 a month coming in, John, to supplement social security and pension, does that change how you would feel about taking risk with the rest of your money.
Speaker 2 26:43
Yeah, absolutely, man. For sure.
Speaker 1 26:45
I think most people would agree that if you had all the income that you could want or need, you’d probably feel more empowered to take risk with a piece of your money, and you wouldn’t have to worry about locking in losses. You could go back to the old ideology of, hey, when we lose money on paper, it doesn’t become a true loss until we realize it, right? And that’s just a function of time. So, John, you’ve talked about this on the show for a while now. I know I certainly have. It’s just this idea of bucketing money, yet we see so many people who have done a great job saving money. I’ve seen people come into our office, 3 million, 4 million, $5 million but every dollar does not have a purpose. They don’t have it bucketed out to say, I have a safe money bucket for income, I have a risk bucket for inflation protection and growth, I have a bank bucket for emergencies, I have a travel fund, I have a health care fund. Yet, when you have that level of structure, which is important word you used in the last segment, structure, I think the one thing I’ve noticed in having done this for as long as I have, and counseling the number of people that I’ve personally counseled, when you treat your retirement plan with that level of structure, the amount of relief and confidence it gives you is off the charts. And when you get to retirement, confidence is the one thing that you cannot go without, in my opinion. If you have confidence to know that you’re doing the right thing, it takes all of the other financial stress away,
Speaker 2 28:21
you know, guys, I’m sitting here, and you guys are going back and forth, and I just.. I just think of so many of our listeners out there are sitting on the portfolios, they haven’t made a move as far as planning, they just plan right now, the plan is I’m just going to show up, I’m just going to show up, I’m going to pick withdrawal percentage, and I hope it goes well, and I start thinking about the scenario, or the analogy I’ve always used. If I’m going to go on this safari, and I’m not just going to go to the jungle and walk in and hope it goes well, you know, I’m going to do my research, I’m going to find a professional guide, somebody that’s done this a lot, I mean, like a lot,
Speaker 1 29:00
and I’ve seen online reviews, I’ve seen great pictures. I’m like, you know, what I’m gonna go with this particular guide, and I’m gonna go to the jungle. I’m gonna have a wonderful safari, and I just think there are a lot of people out there that they don’t have a clue on what they need to do. Now, they’ve done that heavy lifting, I always say it, you know, they’ve saved it, they put it away, and now they’ve got to take the next step. Prashant, yeah, I think that’s exactly right. It’s all about having that plan in place. The planning is ultimately what provides the structure. The structure is ultimately what provides the confidence. I want to go back to bond funds here, just because we have a little bit of time left in this segment. Bond funds are just tools, it’s one tool in your toolkit when building your portfolio. John, the risk is not in owning the bond funds, it’s depending on the bond funds for the wrong thing at the wrong time, isn’t it? I. We’re not saying that all bond funds are bad. We’re not saying all annuities are good. We’re not saying you should exclusively have all your money in the stock market. All we’re saying, I think, is that every dollar at this stage of the game should have purpose behind it.
Speaker 2 30:15
Yeah, I 100% agree, and I love what you just mentioned there, that not all bonds are bad, not all annuities are great. You know, there is a specific reason and use case for each of the solutions that we incorporate in our clients’ financial plans. As a certified financial planner, this is one of the most advanced designations in this industry. The standards of conduct that I have to hold, and you know, I would say that we carry these standards throughout everyone in our office, even if they’re not a CFP. Are at such a high level that the diligence and homework that we have to do into making these recommendations is far above what you’re going to find at a lot of other firms that don’t have a practicing CFP. Everything that we do is in the absolute best interest of our clients as fiduciary advisors, as well. So, when we talk about the positive impact of a potential annuity, or even the positive impact of some bond funds, because our clients hold bond funds as well, there’s a specific use case. There’s a specific objective for every dollar that we put to work in all of our plans, so when we, you know, talk about these solutions, and we talk about, you know, the advantages and the disadvantages, just keep in mind that whatever your situation warrants is what we’re going to recommend, and at the end of the day, it’s your money, we’re just the advisors, it’s just our perspective, but I will also say this as an address rehearsal, right, we have to get this right the first time. I was doing a workshop last night in Annapolis, and I asked the audience, you know, what do you think the number one worry or concern that people come into our office have? And everyone said running out of money, running out of money, high taxes, running out of money, and I said it’s a great guess, but believe it or not, it’s the day
Speaker 1 32:00
that you find out you’re running out of money, and there’s absolutely nothing that you can do about it. That’s a heck of a lot scarier than actually getting to the point, because you’ve already foreseen that. So, to ensure that that doesn’t happen to you, have structure in place, have you know intentionality with all of your investments. Work with a professional, you know, I think that’s that’s how you find success in retirement, as well as peace of mind. Take that time back for yourselves in retirement. Retirement is really almost like you’re flying across the country. If you’re retired, if you’re in retirement, or within a few years of retirement, your plan needs to do more than just get you airborne, right? It actually needs to help you land the plane safely. Okay, if you’re not sure whether your advisor has you on track, if you don’t know where your retirement income is going to come from, or how much it’s going to be after taxes, after considering the threat of rising costs. Great opportunity, folks, for you to call the phone number, it’s 800-653-8404 it’s 800-653-8404 Schedule that complimentary conversation with our team of advisors. Let’s talk specifically about your situation, the things that are important to you to make sure that you have a really good plan in place. You can also visit Retire maryland.com request a free copy of my book, Fiscal Health Retirement Wealth.
Speaker 2 33:26
When we return on Retire Smart Maryland Radio, final segment, we’ll wrap it up again. That’s coming up next, you We are back on Retire Smart Maryland Radio. Your hosts, Prashant Sabapathi, and John DeFeo. You can find them at Elite Income Advisors. They’re headquartered Ellicott City Satellite Office in Annapolis. I’m Morgan Patrick. Pleasure to jump on and just talk about the importance of the plan being proactive, not sitting on just the portfolio and hoping it goes well, but really dig in and have that plan, and there are a lot of you out there that are doing that, sitting on the portfolio, they’re just as many, probably halfway down the path, and you’re a little frustrated, maybe a second opinion is in your future, we’ll talk about that as we move through the program, but guys, we’re gonna, we’re gonna dive in on this last segment and just talk about that one thing that hasn’t come up yet on the show, and that is taxes.
Speaker 1 34:30
Got to make sure that you’re planning for these, because what do we always say on the show? Do we think they’re going to go up in the future? I don’t know, 38 trillion and counting in debt, we think they’re going to go north. Yeah, I think that’s exactly right. I’m surprised we made it all the way to segment four without talking about how to treat your retirement taxation. And so, look, I think when you design a retirement plan, there’s certain pillars or silos, whatever you want to call them, of how to build that plan, and it’s. Really, built on the back of four or five different categories. Number one is market volatility, which we addressed in segment one. Number two is where is your income going to come from, which is something we talk about every single week on this show. Number three is how to deal with inflation, and I think to put it very simply, the answer to higher costs is higher income, right. And so inflation protection is a big component, but number four, I think, has to be how taxation is going to impact your retirement, and taxation is kind of a nasty domino effect, if you think about it. Okay, so let me just break this down, and then John, I’d love your thoughts on this. Let’s say that going back to our example from the last segment, let’s say that I needed $10,000 per month in order to live my pension and my social security, you’re getting me 7000 which means I have to withdraw a net $3,000 a month for my 401 k or IRA to reach my 10,000 Okay, now let’s say I’m used to paying a 20% tax rate as I’m withdrawing that 3000 net, but then let’s say sometime in the future my tax rate goes from 20% up to 30% What I now instantly have to do is withdraw more money, gross, to net the same amount, right? Because my tax rate is higher, and so if I’m taking more money from my portfolio to get to the same result, that inadvertently or indirectly puts me at additional risk of exhausting the retirement savings that I have and running out of money a little bit sooner. What happens if that happens when the market goes down and we have to sell low and lock in our losses? And so this is why taxes are a domino effect. John, maybe you can talk about maybe the top one or two strategies that our clients are employing in 2026 to help mitigate or even eliminate what I would call tax risk in retirement.
Speaker 2 37:18
Certainly, yeah, and I think it primarily depends on where you’re taking the income from, as you just mentioned, you know, if it’s coming from a retirement account. If the majority of your savings are in one of those tax-deferred plans, like a traditional IRA or 401 k, you’re a TSP for federal workers. Every dollar you take out of that plan, you’re paying state, local, and federal tax on right, so one strategy that we employ with our clients are strategic distributions of those retirement funds in years where the tax bracket may be lower, so maybe you’re looking at retiring short, very shortly, you’ve got some cash in the bank, you’ve got other assets you can live off of that keeps your income tax bracket relatively low, we may go ahead and recommend that you take some of that income from your IRA or your 401 k out before you need it at the lower tax rate and reinvest it in some capacity, so that you’re not pulling more money out down the road at a potentially higher rate.
Speaker 1 38:20
So that’s really interesting. I want to, I want to expand on that. Okay, you’re actually saying that even though you don’t necessarily need the money from your retirement account, it actually could be more beneficial for you from a tax standpoint to withdraw it anyway, so that you pay the taxes at today’s rates that we know and understand, so as to avoid potentially paying a higher rate in the future, is that what you’re saying?
Speaker 2 38:45
That’s what I’m saying. And we get the same reaction from a lot of the people at our workshops, and their reaction is, you’re telling me I’m going to give Uncle Sam a chunk of this change before he absolutely has to get it, and our answer is yes, because you have to answer this question, and the answer is yes, only if the answer to this question is that you truly believe that your tax rate today is going to be lower than your potential tax rate in the future, you know, and there are ways that we can model that out, we can assume growth in your investments, you know what your required minimum distributions will be at that certain age, what your income requirements will be when that happens, so we can model out potentially what it would be, but we have no control over what Congress and the folks in DC do with our tax code. We’re all, you know, in the same camp that it has to go up. If we have 38 trillion in debt, we can’t control the expenditures in our economy. The only other side to budget is the money coming in. Right, we talked about on the show all the time, your financial life is about money in and money out. The federal government’s the same way, they can’t control the velocity of the money leaving, so they’re going to have to increase revenues, and they do this through taxes. So, if we can pay our taxes on this money that we’ve deferred over the years. Errors at a lower rate today than we’d have to pay in the future. That absolutely, I say, do it, and do it with conviction, right? Yeah, we know that we’re in the third most favorable marginal income tax bracket in history. So, I don’t know that it’s going to get much better than this in the short term.
Speaker 1 40:16
What if you don’t need the money? Like, what if my advisor tells me to take money out, and I don’t have a use for it. I’m living off of cash, I’m living off of pension and social security. What do I do with that money?
Speaker 2 40:28
Great question. That’s when you perform a Roth conversion, you simply move the money from one account to another, you pay the taxes on it up front, it goes into the Roth IRA, where this money can now grow tax free for you for the rest of your life. That Roth IRA is not subject to required minimum distributions. Your beneficiaries, when they inherit this money, are not going to inherit a tax burden along with that, and again, it’s going to give you tax-free growth and additional sources to draw from it sometime in the future, so if you don’t need the money, pay the taxes at the lower rate. Move it into a Roth IRA, where it can grow tax-free, minimize your potential RMDs in the future, minimize the taxes on your family, minimize the additional cost to your Medicare when you get to a certain age and your distributions are higher. There’s so many examples of how this strategy can help you. Then again, this isn’t a blanket statement that everyone should run out and perform a Roth conversion. There’s a lot of analysis that goes into this. We are typically doing our Roth conversion analysis in mid November. We’re tallying up all the income. It’s a pretty complex process, but if you have the additional funds to pay the taxes. Now, you think that you’re in a lower tax bracket than you’re going to be in the future. I think it’s a great strategy to explore.
Speaker 1 41:47
Just to give a quick client example, you know, I was visiting with someone, one and a half million dollars in pre-tax retirement assets. They’re not actually needing that 401 k IRA money, the pretax, they’re not needing that money to live on in retirement, so by the time we forecasted required minimum distributions, even if the tax code stayed the same, which I’m not sure that it will, but even if it does stay the same, we had them going up to a 32% tax bracket when they reached required minimum distribution age, so their income would spike, and they would go to the 32% marginal income tax bracket. What we found is that by doing Roth conversions at a clip of about 60 to $75,000 per year, we could actually keep them in a 22 maybe a 24% tax bracket, and then that money that’s been converted doesn’t get subjected to the potential 32% tax that would be owed on the required minimum later, and so John, that kind of speaks to exactly what you were talking about, you’re going to pay Uncle Sam one way or another, it’s your choice as to whether you want to pay today or you want to pay later. I think that the advantage that we have today is that we actually know what the tax code is today. Tomorrow we have no idea whether or not DC will change the game, and so that’s why we always talk about the fact that you are in a partnership with the IRS. Okay, you’re in a partnership with the IRS on your retirement accounts. The problem is they’re the managing partner, they’re the ones that set all the rules. You’re just the minority partner who has to do whatever they say and operate within their rules. So, does it make sense to proactively pay the taxes now, so that you never pay the taxes later? This is something that we refer to in our office as the power of getting to zero. It’s the power of zero. I always say zero is our hero, and that’s because zero represents the tax bracket associated with your Roth IRA. So, if you have the opportunity to get tax-free income in retirement, I think it is absolutely well worth exploring whether or not that’s the right thing for you to do, but, like John said before, it’s not a one size fits all. You have to make sure that the plan you’re getting is consistent with your objectives, your goals, your retirement timeline. I think everyone should take a look at
Speaker 2 44:15
it. I mean, it’s about having the plan, and it comes in layers, it’s not just one particular pathway, you got to have an open mind, you got to have the conversation, and they’re going to be ways to get you to your retirement goals, but certainly don’t forget about the tax aspect of this, and having the conversation about conversions during the tax window that is currently provided, that’s worth a conversation. Now, the opportunity to get on the calendar with Prashant, with John and their team at Elite Income Advisors. Well, it’s right now, and these are complimentary appointments. And again, you’re not obligated to become a client, they’re not obligated to take you as a client. This is to see if it’s a good fit. Prashant, walk us through it.
Speaker 1 44:55
800-653-8404 that’s a phone number when. Dial that number, you can schedule that free conversation with our team. We’ll talk through your income, we’ll talk through your social security plan, we’ll talk through your legacy plan, your RMDs, and most importantly, we will talk about how taxation will have some sort of an impact on your retirement if you’ve never gone through that level of analysis, or if your advisors never shared with you how taxes may impact your retirement, it’s a great opportunity to get a second look at it. 800-653-8404 There’s a chapter in my book called Rescue Your IRA, and when I talk about rescuing your IRA, it’s rescuing the IRA from tax liability by employing strategies like proactive IRA drawdown, like John was mentioning, or Roth conversions. Free copy of the book, you just have to visit Retire maryland.com fill out the questionnaire. I will send you a free copy of the book this week. I’ll pay for the shipping. All you have to do is go to the website, it’s Retire maryland.com Well, time flies when you’re having fun. Another edition of Retire Smart Maryland Radio in the books for Prashant Sabapathi and John DeFeo. I’m Morgan Patrick. We’ll see on the radio next week.
Speaker 3 46:19
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