Welcome back to another round of Sound Retirement Radio.
Imagine if a few small changes to your retirement plan could result in hundreds of thousands more at the end of your life! In today’s podcast, I’m going to walk you through three powerful strategies that can optimize your plan and potentially increase your savings by hundreds of thousands of dollars.
If you enjoy todays podcast be sure to share it with a friend and leave us a 5 star review.
The Retirement Budget Calculator is an intuitive tool that promises ease and accuracy. However, like any tool, user error could potentially lead to costly mistakes. To avoid this, let the experienced advisors at Parker Financial LLC guide you.
When you hire our team, we offer a comprehensive review of your current investments, taxes, and the data in the Retirement Budget Calculator. We will ensure your plan’s completeness and accuracy, helping you create an investment strategy, assist with tax planning, and monitor your plan to maximize your retirement benefits.
At Parker Financial we offer a well-crafted retirement investment strategy, deeply rooted in academic research and financial science which can be the key to a prosperous retirement.
Don’t leave your future to chance. Take the first step towards a sound retirement. Schedule your complimentary discovery session now by visiting Parker-Financial.net let us help you make the most of your retirement years.
Articles, Links & Resources:
Transcript:
438 Optimize Your Retirement- Three Key Strategies for Maximizing Your Wealth
Announcer: [00:00:00] Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now here is your host, Jason Parker.
Jason Parker: America, welcome back to another round of Sound Retirement Radio.
So glad to have you tune in into episode number 438. The title is Optimize Your Retirement, Three Key Strategies for Maximizing Your Wealth. Imagine if a few small changes to your retirement plan could result in hundreds of thousands of dollars more money at the end of your life. In today’s podcast, I’m going to walk you through three powerful strategies that you can optimize your plan and potentially increase your savings by hundreds of thousands of dollars.
We’re going to look at each strategy in isolation, and then we’re going to see what happens when we combine all three optimization techniques. [00:01:00] But before we dive into today’s show, let’s get started by renewing our mind. And I’ve got a verse here for us from Proverbs 21, 21. Whoever pursues righteousness and love finds life, prosperity, and honor.
And then something fun for the grandkids. Why didn’t the mummy have any friends? He was too wrapped up in himself.
Okay. So in today’s show, we’re going to explore three strategies for optimizing your retirement. They are number one, Roth conversions, number two, social security timing, and number three, withdrawal order. And to help us understand the value of each strategy, I created a hypothetical scenario and ran the numbers to see how these changes could improve outcomes.
Remember, planning is very personal and a financial plan is kind of like your fingerprints. They’re going to be very specific and unique to you. This scenario shows how optimization might benefit one couple, but your situation will be different. So always consult with a [00:02:00] financial advisor and tailor the strategies to your specific situation.
Let me introduce you to John and Nancy, the hypothetical couple in this particular situation. John will be 59 years old by the end of this year. Nancy will be 58 years old by the end of this year. And they both plan on retiring on December 31st of 2024. John and Nancy have done a good job saving for retirement, and here’s what their accounts look like.
Nancy has a traditional IRA with 200, 000. They have a joint brokerage account with 500, 000. John has a 401k with a balance of 1, 000, 000. And then John also has a Roth IRA with 300, 000. In total, they have 2 million in liquid investable assets. We’re assuming that their investments grow at 4 percent per year, keeping things conservative.
As you know, I like to always say, let’s hope for the best, but plan for the worst. And the way, the reason I do that is because conservative assumptions might mean that you die with more money than you expected. We’re assuming that. Which could be a missed opportunity to [00:03:00] enjoy those funds. But if you assume overly optimistic returns, you risk running out of money early in retirement.
And so the first scenario isn’t ideal, but the second scenario is catastrophic. And so that’s why I think it’s important that we plan conservatively and adjust your plan every year. Continuously refining the numbers to stay on track and to make sure that the plans work in the way that you would expect it to.
John and Nancy have a house that’s paid off and valued at 600, 000. Their budget requires 10, 000 per month or 120, 000 a year. And we’re going to assume 3 percent inflation on expenses. A 3 percent inflation factor is higher than the 2 percent inflation target that the Federal Reserve has set their sights on.
Inflation means that they’re going to need more income every year to maintain the same standard of living. As a side note, we’ve been seeing higher inflation over the past few years, and that’s something that we need to be mindful of in our planning. As the famed economist Milton Friedman said, inflation is always and everywhere a monetary phenomenon.[00:04:00]
It’s caused by too many dollars chasing too few goods. Policies like student loan forgiveness can exacerbate inflation by increasing the amount of money that people have to spend elsewhere in the economy without a corresponding increase in goods and services. And so what might look like a good short term gain for those with student loans being forgiven can turn into long term pain in the form of higher inflation for everyone.
Additionally. Forgiving others loans and removing their personal responsibility sets a concerning precedent. Potentially fostering a society where individuals are less accountable for their own decisions and actions, regardless of whether or not you’re a Democrat or Republican. I think we can all agree that we don’t want government policies that fuel even higher inflation.
One of our retirement budget calculator community members recently said, I’ve already lost one third of my portfolio spending power to inflation in the very few years I’ve been retired. My net worth is at an all time high, but the spending power is not close to an all time high. [00:05:00] Okay. Milton Friedman also said, The Federal Reserve can print money, but it cannot print wealth.
Okay, moving on to Social Security. John and Nancy will also have Social Security as their only guaranteed income in retirement. They plan to start Social Security at their full retirement age of 67. John’s benefits at age 67 is projected to be 3, 500 per month, and Nancy’s is projected to be 2, 000 per month.
Based on social security mortality tables, we’ll assume John lives to age 82 and Nancy to age 84. Without any optimization at Nancy’s life expectancy based on these variables, 272, 000 remaining in their accounts. And so this gives us a baseline for comparison. Okay, so the first strategy are Roth conversions.
Roth conversions involve moving funds from a tax deferred account, like an IRA, to a Roth account. And this allows your money to grow tax free. And withdrawals from a Roth IRA are also potentially tax free. To make this [00:06:00] transfer, you pay taxes up front to avoid paying them later. For John and Nancy, we modeled three Roth conversions, moving 100, 000 per year for the first three years of retirement.
With these conversions, their remaining balance at Nancy’s life expectancy improves to 394, 944. This is an increase of 122, 000 from our baseline, and lifetime taxes are reduced from 350, 000 to 244, 000. So they end up with more money and pay less money in federal taxes. It’s a win win. Strategy number two is social security.
So next we optimize their social security by delaying benefits to age 70 rather than starting at age 67. By waiting, they earn 8 percent delayed retirement credits each year, increasing their benefits by 24%. With Social Security, it’s not just the delayed retirement credits, but remember that Social Security is tax efficient income.
So in a worst case scenario, only 85 cents of every dollar is subject to taxes, meaning [00:07:00] that a dollar from Social Security will go further than a withdrawal from an IRA. With this change alone, John and Nancy would have 358, 878 remaining at Nancy’s life expectancy, an improvement of 86, 871. Plus, lifetime taxes would be reduced to 299, 431 compared to the baseline of 350, 644.
So again, strategy number two in isolation results in more money and lower taxes. The final strategy is adjusting their withdrawal order. Typically, the standard approach is to withdraw from non qualified accounts, such as brokerage accounts first, then tax deferred accounts like IRAs and 401ks second.
And then Roth accounts last. A proportional strategy, however, involves withdrawing funds proportionally from both taxable and tax deferred accounts first, while leaving Roth accounts for last. Withdrawals are taken from taxable and tax deferred accounts based on their respective balances at the time of withdrawal.
[00:08:00] And then once those accounts are fully depleted, withdrawals then come from the Roth accounts. So let’s look at John and Nancy’s example. They have four accounts. Nancy’s IRA is valued at 200, 000. Their brokerage account is valued at 500, 000. And John’s 401k is valued at 1, 000, 000. And then John has a Roth IRA valued at 3, 000, 000.
So together, all these accounts total 2, 000, 000. But the combined total of their taxable and tax deferred accounts, excluding the Roth, is 1. 7 million. To withdraw proportionally from their taxable and tax deferred accounts, we divide Nancy’s 200, 000 IRA by 1. 7 million, which equals 11. 76%. We divide the 500, 000 brokerage account by 1.
7 million, which equals 29. 41%. And we divide John’s 1, 000, 000 401k by 1. 7 million, which equals 58. 82%. This strategy ensures withdrawals are spread across accounts based on their size, allowing the Roth assets to be preserved [00:09:00] for later use. And so here’s how the withdrawals break down. You’ve got 11. 76 percent from Nancy’s IRA, 29.
41 percent from their brokerage account, and 58. 82 percent from John’s 401k. Using this proportional withdrawal strategy, John and Nancy’s remaining balance at Nancy’s life expectancy increases to 442, 289, 170, 280 more than the baseline scenario. Additionally, lifetime taxes drop to 245, 583, resulting in a savings of 105, 061 in taxes.
So now that we’ve seen the individual benefits of each strategy, let’s look at what happens when we combine all three. When we implement Roth conversions, optimize social security timing, and adjust the withdrawal order, John and Nancy end up with 493, 546 remaining at the end of life, a total improvement of 221, 539.
On [00:10:00] top of that, lifetime taxes are reduced to 177, 476, saving them 173, 168 in taxes compared to the baseline plan. When you layer these strategies together, they compound upon each other. Roth conversions give you future tax savings, which compound over time. Delaying social security increases guaranteed income, which means less reliance on withdrawals, allowing your investments to compound and proportional withdrawals further spread the tax load, allowing more of your investments to grow.
In summary, combining these three strategies leads to better results because they work synergistically to reduce taxes, maximize growth, and preserve assets. Each strategy addresses different aspects of retirement income and taxation, and together they create a more efficient and robust plan for long term retirement planning.
So as you can see, making a few small changes to your retirement plan can make a big difference. It reminds me of that quote that says a small hinge [00:11:00] swings a big door. These strategies, Roth conversions, Social Security timing and adjusting the withdrawal order can help you optimize your retirement and reduce taxes.
But the key is that you have to tailor this to your unique situation. The coolest part? You can model these strategies for yourself using the Retirement Budget Calculator. And I recorded a video to accompany this podcast to show you how you can do this same type of analysis for your specific situation.
Just visit sound retirement planning.com and click on episode number 438 to watch the video. If you’d prefer expert help from a financial advisor to optimize your retirement, our team is ready to assist in optimizing your retirement and to help with managing your investments. Oh, and by the way. If you’re impressed with the detail and thoughtfulness in the retirement budget calculator, wait until you learn more about the strategies that we use for investment management in the retirement phase of life.
Please keep in mind that the strategies discussed in today’s podcast episode are hypothetical and for illustrative [00:12:00] purposes only. Actual results will vary based on individual circumstances and no outcomes are guaranteed. Tax laws and social security policies are subject to change. So it’s important to consult with a tax professional or financial advisor before implementing any of these strategies.
The scenarios mentioned are not a substitute for personalized financial advice. For advice tailored to your unique situation, I encourage you to seek guidance from a qualified advisor. All investments carry risks and past performance is not indicative of future results.
Announcer: Thank you for tuning in to Sound Retirement Radio.
For articles, links and resources from today’s show, visit sound retirement planning.com. If you enjoy the podcast, share it with a friend and give us a five star review. Ready to kickstart your retirement planning. Head over to retirement budget calculator.com. Need assistance with investment management, explore our services@parkerfinancial.net.
[00:13:00] Information and opinions expressed here are believed to be accurate and complete for general information only and should not be construed as. tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program.
Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to claims paying ability of the company. Investing involves risk.
Jason Parker is the president of Parker Financial, LLC, an independent fee based wealth management firm located at 9230 Bayshore Drive NW, Suite 201, Silverdale, WA. For additional information, call 360 337 2701 or visit us online at soundretirementplanning. [00:14:00] com.
