Podcast: Taylor Schulte — Stay Wealthy

Episode 60 of the NewRetirement podcast is an interview with Taylor Schulte — the founder of Define Financial and the Stay Wealthy Retirement Podcast — and discusses tax and legacy planning, as well as what are and how to use Donor Advised Funds (DAFs).

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Full Transcript of Steve Chen’s Interview with Taylor Schulte:

Steve: Welcome to The NewRetirement Podcast. Today we’re going to be talking with Taylor Schulte, the founder of Define Financial and the Stay Wealthy Retirement Podcast. We’re going to discuss tax and legacy planning, plus take some listener questions. Taylor is friends with other retirement experts like Dana Anspach and Roger Whitney who have been recent guests. And he joins us from San Diego, California. So with that, Taylor, welcome to our show. It’s great to have you join us.

Taylor: Yeah, Steve, thanks so much for having me. I really appreciate it.

Steve: Yeah. So, just a quick personal question as we could go in, but how’s it going with three weeks in with kid number three?

Taylor: It’s going great. It kind of reminds me how easy the newborn stage is. We’ve got a four-year-old and a two-and-a-half-year-old on top of the newborn, and they’re the most difficult right now. The newborn just eats and sleeps all day. And I’m here trying to tackle these two toddlers and keep them under control while my wife recovers. So yeah, the newborn is doing great. We’re really excited to have our family rounded out. We had a girl, so we’ve got two boys and a girl, and we’re feeling really good.

Steve: That’s awesome. Yeah, just for our listeners, the way we got connected was Taylor posted on Twitter a picture of his new baby and kid number three with the caption, “See you never,” and that resonated with me because I have three kids and I was like, “Yeah, there’s kind of a lost decade that you could be facing.” And we bonded a little bit over that. Anyway, so, before we get into the kind of tax and legacy questions, just wanted to kind of get a little bit on your background, how you got started as a financial planner and ultimately what led you to create your own firm?

Taylor: Sure. So, it actually goes back to when I was about age 12 or 13, every Christmas my grandfather was known for giving us some cash in an envelope, it’d be $20 or $50. And we’re always excited to go to grandpa’s house because we’d get some cash to go buy a video game or something. And that year, instead of cash he gave us grandkids a stock certificate. And he used that stock certificate as a tool to teach us about money and investing and how to look up the stock in the newspaper and dividends and compounding interest and all that good stuff. And I remember being really disappointed at the time, right? I wanted that cold, hard cash. There wasn’t much I could do with a stock certificate at that time, but it really did kind of pave the way for me to becoming a financial planner.

Taylor: It piqued my interest in finance in general. And as I learned more and more, I just I knew that’s what I wanted to do. So, on day one when I graduated college at age 22, I had a job at one of the very large brokerage firms here in San Diego, and I was thrown right into the fire. So, I started kind of building my business then, and I was there for, gosh, five or six years. And I kind of quickly learned that it wasn’t my long-term home, as I’m sure a lot of your listeners are familiar with. The large well-known brokerage firms don’t adhere to the fiduciary standard. So, I found myself sitting in a lot of these meetings listening to ideas for how we can make more money or how we can make the firm more money rather than how we can make our clients more money. And it just kind of felt backwards.

Taylor: And so kind of once I uncovered this and learn more about the fiduciary standard and how we can do things differently for clients, I launched my firm. So, I launched Define Financial in 2014. We now work with about 70 families around the country. We only work with people over age 50. We specialize in retirement and tax planning for those individuals. And we just stay really, really narrow, just work with that exact demographic. We like to just do our best work with those people. I say, you wouldn’t go to a neurologist if you need a knee surgery. And so, we don’t want to try to serve everybody. We just love doing tax planning and investment management and retirement planning for people over age 50.

Steve: That’s awesome. Yeah. Did you start out saying, “Okay, we’re going to focus on people over age 50,” or kind of fall into it as you got a couple of years into the practice?

Taylor: Yeah, kind of fell into it just because you were taught in the early days to essentially work with anyone and everyone who was willing to trust you with their money. And so I had to kind of unlearn a lot of the things that I was taught. And again, just taking a page out of the doctor profession or the legal profession, just learning that we can get really narrow and just do a really, really, really good job for a very small percentage of the population. We don’t need to serve everybody necessarily. And I always just, I’m kind of an old soul at heart, and I always just kind of enjoyed working with my older clients. And so we went backwards for a couple of years, transitioning some of the younger clients out to other firms and just getting really focused. So, that’s where we’re at today. And yeah, it’s been really exciting, a lot of fun, and obviously with some of the tax changes coming up it’s been fun for us to work through those as well.

Steve: Right. Well, it’s a good niche too. I mean, when I talk with Dana you can see just how much thought goes into it and there’s a lot of complexities, especially as people are kind of in that transition period, kind of leading into retirement. There’s opportunities around tax efficiency. We’ll talk about some of that. And then as you kind of first get into it, like, how do you turn on the income? The psychology of starting to spend versus save, thinking about healthcare, especially before Medicare. There’s a lot that that happens. I mean, I think a lot of people when they think about this segment, they’re like, “Oh, well, people like piling up money, but then when they get to retirement there’s really not going to be that much to do so will they stick around as clients?” But it sounds like you’re building a pretty robust practice serving those folks.

Taylor: Yeah. We actually hear the complete opposite. So, a lot of the clients that joined our firm are your traditional do it yourself investor who has been at Vanguard for 30 years and they’ve been working hard and saving money and investing in low cost index funds and they they’ve done a great job saving. And when they start to think about retirement, they realized that the decumulation phase is very different than the accumulation phase, right? It’s fairly straightforward to make money, save money and invest it in low cost funds and just keep your head down. When you get to the decumulation, it’s like, “Okay, I’ve got all this money now and they’re all in different types of accounts with different tax treatments. How am I going to turn this into a retirement paycheck?”

Taylor: Maybe income’s not a big issue for you. Maybe you have pensions and other sources of income, then it becomes like, “Wow, I’m not realizing I’m going to have a giant tax problem, right, at age 70 or 72 when required minimum distributions kick in, how am I going to combat this giant tax bill that’s going to hit me?” And so, we often hear, “Yeah, I’ve never worked with a financial planner, but now I’m realizing that I need to work with somebody. I just don’t really want to spend my retirement figuring this out myself.” The other thing that we hear too is that there’s always one spouse that kind of takes the lead in the financial relationship for the household. And we often hear, “If I got hit by a bus, my wife or my husband wouldn’t know what’s going on.” And so they want somebody in the picture to help them out.

Steve: Yeah, we hear that too, for sure. And I also think as people live longer and they face cognitive decline, there’s some risk and there’s questions about setting up your legacy and your power of attorney and all that stuff properly. But if you think that there’s a risk that someone’s going to have weaker decision-making, how you navigate that?

Taylor: Yeah.

Steve: And we’ll dive into that in a second, but on the tax planning side, just at a high level, what are some of the big considerations that your users or clients come to you with?

Taylor: Yeah. I think a common misconception by a lot of savers, whether you’re in the accumulation phase or not or you’re entering retirement is, “I don’t have that much money,” or, “I don’t make that much money. Tax planning is for the ultra wealthy,” and that’s not really true, right? I mean, just choosing the type of retirement account that you’re saving in, a traditional IRA or a traditional 401k versus a Roth. I mean, that is a tax planning consideration or a tax planning decision that you can make. So, some of the top tax planning considerations are just that. So, the types of accounts that you’re using, that you’re saving in, the tax efficiency of the investment vehicles you’re using, right, different tax treatment for individual stocks versus ETFs versus mutual funds, Roth conversions and charitable giving are two big considerations which I know we’re going to dive into today.

Taylor: And then lastly, just really, really high level is starting this, what we call, proactive tax planning early. I think just too many people wait until they’re retired or they’re in their mid sixties to address tax issues in retirement. And not that you can’t address them later on in life, but the earlier you start the better, the more time we have to plan the better. So, just in general, I’d say start tax planning early. Even if you don’t think that you’re a tax planning candidate for whatever reason, I promise you begin that journey now and start putting those things into place because you can do a lot between now and retirement and between now and end of life to reduce that tax bill.

Taylor: And I just want to kind of preface today’s conversation about taxes. We are not trying to avoid taxes, right? We all need to pay our fair share of taxes. I’m totally on board with that. What we don’t want to do is overpay the IRS, right? Leave the IRS a tip. So, a lot of what we talk about is just taking control over your tax bill because if you don’t, the IRS is going to make you pay taxes on their terms and it can come in at an inopportune time. So, start that tax planning early, which is why we’re having this conversation today.

Steve: Yeah, for sure. Once I was having a conversation with a small business guy a couple of years ago. It was just outside of our work, and he was actually in the tax business, but he owned a bunch of valuable, but illiquid assets in qualified accounts. And he was like, “Yeah, I can be facing huge RMDs on these illiquid things. So, I’m going to have this big tax liability.” He invested in businesses and real estate and stuff like that. And he was really having to think hard about how am I going to create the liquidity. And that’s where I totally get it. Yeah, getting in front of the scene, understanding what could happen. I think a lot of people don’t realize that if they have a lot of assets they’re going to be having more income in retirement than they had when they were working and they’re going to have to pay taxes on that stuff.

Taylor: Yeah, exactly. I often say, “You probably will find yourself in a higher tax bracket in retirement then as a working professional when all these things start to collide,” especially if you have a pension, right? Pension plus social security plus RMDs, maybe you have rental real estate income, all of a sudden you’ve got a mid six figure income that you didn’t anticipate.

Steve: Yep. So, is there kind of like an order of attack when you’re dealing with your clients where, “Okay, let’s think about Roths first, let’s talk about donor advised funds or let’s think about contributions,”? I mean, how do you kind of approach it?

Taylor: I think it depends on what stage of life you’re in. If you’re approaching retirement, one of the first things that we do with our clients is determine your total, what we call, your total retirement tax bill. So, how much are you going to pay the IRS from now until end of life? So, let’s just start there with that baseline, right, and determine how much you’re going to pay the IRS from now until the end of life. Second to that is starting to identify your current tax bracket today versus your projected tax bracket in retirement, specifically again, at those ages, age 70 and 72. Age 70 is when social security kicks in if you choose to delay it that long. And age 72 is the required minimum distribution age. And so comparing your current tax bracket today to your projected tax bracket there in the future, and then you can start to work through, “Okay, what can I do between now and those ages to reduce the amount that I’m going to pay the IRS from now until end of life?” And so that’ll kind of dictate your order of operations.

Taylor: If you’re still in the wealth accumulation phase and not quite ready to approach Roth conversions and charitable giving and things like that, yeah, starting to think about your current tax bracket, if you’re in an extremely high tax bracket, I mean, taking that deduction now and using a traditional 401k makes sense, but I see far too often people just default into a traditional 401k or traditional IRA because they just don’t know any better. And it may not make sense for a large percentage of people unless you’re in that really high tax bracket and you see that tax bracket dropping in retirement. So, there’s a few things to do there first to determine that order of operations.

Steve: Yeah. Any kind of key things people should remember about if they’re looking at a Roth, that they should know about this and how it works?

Taylor: A Roth IRA or Roth 401k?

Steve: Yeah.

Taylor: I mean, we always say, “Roth is the magical account,” right? You get money in that Roth and it not only does your money and investments grow tax deferred, tax free, but it also comes out tax-free. And so kind of the name of the game is getting as much money as possible in those Roth accounts. Now there might be years, again, in the wealth accumulation phase where it might not make sense to put a bunch of money in your Roth, even if you have the ability to, but at the end of the day getting as much money into those Roth accounts as possible not only can help your tax bill in retirement, but also provides just a ton of flexibility because if you’re in retirement and you have all of your money locked up in a traditional IRA and you need a new roof on your house or there’s an emergency of some sort and you have to tap into your retirement accounts, you’re going to have to pay a tax bill just to get access to that money. So, having that Roth, again, not only helps with that tax bill, but it gives you flexibility when there are unforeseen things that happen in retirement.

Steve: Yeah. I know a lot of our users are really thinking hard about doing Roth conversions from their normal traditional qualified IRA 401ks into the Roth vehicle if they have lower income years, kind of at the end of the traditional career, but before they start social security. So, maybe between 60 to 70, can they capture some of the tax benefits and kind of fill up those marginal rates? But yeah, you have to be thoughtful about it and you got to be prepared to pay the taxes now and kind of think through the long-term repercussions of it.

Taylor: Yeah, exactly. Yeah. And we call those years your gap years, the year you retire until age 70 and 72. And your gap years are our prime years for tax planning. So yeah, you nailed it. One thing I want to highlight though, is you may not always be in a lower tax bracket, right? Let’s just say that you’re in your gap years right now and you’re in the 22% tax bracket and you run some projections and you find out that you’re going to be in the 22% tax bracket for all of retirement, right, it’s not going to change. That doesn’t mean that you shouldn’t consider Roth conversions because having money in those traditional IRAs or traditional 401k is essentially a growing tax liability, that RMD is just getting higher and higher by the day. So, a very simple example is, would you rather pay 22% on $1 million today or don’t do anything, let that million dollars grow to $2 million and then pay 22% on $2 million, 10 years from now? So we want to be careful of those growing tax liabilities too. It’s not just always about comparing today’s tax bracket versus the future.

Steve: For sure.

Taylor: Yeah, yeah.

Steve: Yeah. And I think with RMD is what a lot people don’t understand is that they grow over time. So the percentage you have to take out annually is increasing as you age. So the IRS is saying, hey, I think they’re got to live to age 90. At 72, you’re taking out one thing as you approach 90, the percentages become very significant. And if you have big balances, you’re going to be like, okay, I’m out 200 grand. I’m qualified and paying taxes on it. I have no choice. So that can happen. And I think you have to be thoughtful of, when do I use this money? Because we only live once. So last thing on Roth, I think there’s also some estate benefits to it as well. Right? That it can go to your heirs in a much more tax efficient way?

Taylor: Yeah, absolutely. I know we’re going to dive a little bit more into legacy planning, but there are some new tax laws that went into effect last year. And if your child or grandchild for that matter, inherits your traditional IRA, they now need to exhaust that account. They need to withdraw all the money from that account and pay taxes on it within a 10 year time period. And depending on where they are in their working life, that may or may not be a good thing for them to have to hurry up and take money out of that account and pay taxes on it. It may not be what you want for them.

Taylor: So by leaving them, leaving your heirs a Roth IRA instead, gives them a ton of flexibility. So it’s much easier for them to inherit a Roth IRA than a traditional IRA, especially given these new tax laws. So I think it’s something to think about that maybe even if there isn’t a huge tax benefit to you for doing Roth conversions or stuffing money into a Roth 401k or Roth IRA, maybe legacy planning is really, really important to you. So just forget about the tax benefits while you’re alive. You might be putting your children or grandchildren ahead of you and saying, well, I just want it to be much easier on them.

Taylor: So when they inherit this bucket of money, they don’t have to worry about taxes and the IRS breathing over their shoulder. So something that I think often gets ignored. And it’s tough too, right? Because if you’re 60, 65 years old, you still have a long time to live and you don’t really know exactly what your intentions are going to be at death. So these are some hard conversations and they’re fluid. You might not know today, and that’s why I really encourage, especially married couples to have these conversations regularly. Have a nice glass of wine and continue talking about, what do we want to do with this money?

Steve: Right, right. For sure. That’s great. Last quick, just color commentary on Roth before we go. So today I saw headlines on Twitter that Peter Thiel has stashed $5 billion in Iraq. And so some inside baseball. I know some folks that know him and like literally 10 years ago, people are like, yeah, you should consider putting founding shares and holding it in your Roth, because people are doing this. And it’s so funny to fast forward now. It’s getting airplay. I mean, specifically people were saying, this is something that the Facebook mafia are doing. They’re taking these positions and they’re putting it in Roth’s. And to see it now as a headline and by the way, it turned into $5 billion and it’s all tax-free. It’s funny, but it’s going to get a lot of attention clearly. I mean, that was not the intent, but people will find ways to be super tax efficient or too tax efficient.

Taylor: Yeah. And unfortunately with those headlines, it may be doing a disservice to the rest of us now that that’s front and center in the media and the news. Some of those loopholes might be closed now and that’s unfortunate.

Steve: 100%.

Taylor: But yeah, it is wild to have $5 billion inside of a Roth IRA. I’m sure the IRS is not too happy about that.

Steve: Yeah. Well, I think that it’s a confluence of Ross, but also self-directed IRAs, which is another topic. I mean, I mentioned it, and I think some people, they’re thinking about alternative assets and real estate and they’re like, oh, how can I hold this? Where can I put this asset? And there are some real tax efficiency things that you can do. All right. So a couple of the things on tax planning, just, could you give us a little color on donor advised funds, how they work, who they’re for and how people use them?

Taylor: Yeah. If you’re not familiar with donor advised funds, do yourself a favor and start to read up on them or talk to your financial planner about them. I’ll just preface what I’m about to say by saying, you have to be charitably inclined to first. So donor advised funds provide a great tax benefit, but you have to be charitably inclined. So we’re not going to use a donor advised fund to try and save money on taxes. We’re going to use it to be more intentional about our charitable giving and maximize those tax benefits. So if you’re charitably inclined, I would highly suggest looking into donor advised funds. They’re extremely flexible and they’re low cost. And now there’s companies like Fidelity Charitable that don’t have any minimums. So sometimes when we think about charitable giving, again, we think about the ultra rich. I don’t have enough money to engage in meaningful charitable giving.

Taylor: And that’s just not true, especially with donor advised funds. So the great thing about donor advised fund is you can put money in the donor advised fund today and get the tax benefit, get the deduction from that contribution today, but you don’t have to give away the money to charity right away. So you put that money in a donor advised fund. You can invest it in stocks, bonds, or just keep it in cash. And then you can give that money away over time, maybe a little bit each year. Maybe you give it away all at the end of life, but you get the tax deduction in that given year. So if you have a high income tax year, a big tax bill coming up and you know, you’re charitably inclined, you might use that year to put a good amount of money in that donor advised fund, get that tax deduction today to help your current year tax bill.

Taylor: But then take your time donating that money throughout life. And again, it might be end of life. And this is where if you’re not currently giving to charity. So one very simple example, maybe you give $10,000 per year to one organization every single year. Well, again, you find yourself in a high income tax year, maybe you know you’re going to give away $10,000 for the next 10 years. That’s $100,000. Maybe you put $100,000 today in that donor advised fund, get that tax deduction on $100,000 contribution, and then still give away your $10,000 each year for the next 10 years.

Taylor: So that’s one common scenario, but the other is, well, I’m not engaged in charitable giving today, but in my trust it says that end of life, we want $100,000 to go to these three charities at the end of our life. So in that situation, we often have this conversation with clients. Well, when you’re not here anymore, you’re not going to get the tax benefit, right? Yeah. Your money will go to charity, but you’re not going to get any benefit while you’re alive. So if you know you’re going to give away a certain amount of money at end of life, you might consider putting that in a donor advised fund today. Take $100,000 put it in a donor advised fund. You can invest that money while you’re alive, in addition to getting that tax deduction.

Taylor: And not only will you get a tax deduction in that current year, but that $100,000 could grow to 200 or 300 or $400,000 at end of life. Those charities are going to be really thankful that you did that. So again, they start thinking about what do we want to do in terms of charitable giving and legacy planning and end of life? And start to think about, does a donor advise fund fit into any of this? These are big conversations and tough to have some times, and not a lot of clarity, but you can also just start really simply too. You don’t have to put six figures into a donor advised fund right away. You can start with a little bit and see how it goes.

Steve: Right. Yeah. That’s great to, I mean, I actually didn’t fully understand them, so it’s great to get the color on them and then understand how they’re used. And yeah, I also get the idea of mechanically putting it in place and testing it, so you have it ready to go. And then you can be thoughtful if you have higher income years. I do know there are a lot of folks that they’ll be accruing wealth, and then instead of they’ll donate stock, for instance, to try and impact their taxes. Can we talk a little bit about QCDs, qualified charitable distributions and the mechanics of how that works?

Taylor: Yeah. Really quick, if you don’t mind, I just want to circle back to two more points on the donor advised funds.

Steve: Sure.

Taylor: One is, if you’re engaging in Roth conversions during your gap years, and you are charitably inclined, then using a donor advised fund during those years can help offset that tax bill from the Roth conversion. Because remember when you do a Roth conversion, you pay taxes on that conversion, not everybody’s super excited about that. So you can use a donor advice fund at the same time to help offset that tax bill. So pairing a Roth conversion with a donor advised fund is a really great tax strategy to consider. The second thing I just want to make sure we highlight is in a donor advised fund, you can contribute cash. You can also contribute appreciated securities. Stocks, bonds, real estate. So if you bought Tesla stock, $10,000 of Tesla stock, and now it’s worth $100,000 you’re going to pay capital gains tax on that stock. If it’s in a taxable account.

Taylor: You can actually just donate that those appreciated securities straight to the donor advised fund and not have to pay those capital gains. So not only do you avoid the cap gains, but you’re able to maybe donate a little bit more to the charity because you’re not paying taxes. So donating appreciated securities to the donor advised fund can be a great strategy to consider. So your question about QCD is qualified charitable distributions. This is another tax strategy. Giving money from your traditional IRA accounts. Some people we talk to, they don’t have just cash lying around to go and put money into a donor advised fund, but they have traditional IRA accounts. Most people have them. And again, at age 72, the IRS is going to come knocking on your door and you’re going to have to take your required minimum distributions.

Taylor: And like you said, Steve, these can be hundreds of thousands of dollars each year, and you may or may not need all of that money. So one way to avoid the taxes on that RMD, because it’s taxed just as you earned it, working. It’s taxes, ordinary income, you can take a portion of that and you can send it to a charity through a qualified charitable distribution. And it goes straight to that charity, and you avoid paying taxes on the income. Now you also don’t have the money in your pocket anymore, right? It goes straight to charity. But if you don’t need the money and you’re charitably inclined, it’s a great way to give to charity by using your RMDs, if you don’t have cash lying around. A common situation we see here and we just ran into it a couple of weeks ago, a client gives a decent amount of money each month to their church.

Taylor: Let’s just call it, $1,000 a month. And it just comes from their checking account each and every month, which isn’t very tax efficient. So instead, what we’ve got them doing now is just donating it through QCDs. They’re not doing it monthly. They’re just doing it one time per year, but now they’re doing it through the QCD. So pre-tax money going straight to the organization. And now they’re able to give them a little bit more, because they’re not paying taxes on the distribution. So it’s just a way to be a little bit more thoughtful about your charitable giving. Again, it may not be about you. You might not about reducing your tax bill, but when you think about it by you not having to pay taxes, you could actually give the charity more money. So it does benefit the charity as well.

Steve: Right. So at a high level, essentially, you’re going to be forced to pay taxes one way or another. And if you use donor advised funds or QCDs, you can really essentially trade off some of your tax liability for charitable giving that you control and you can dictate how your wealth is used, versus the government at a high level.

Taylor: Yeah, exactly.

Steve: Yeah. Makes sense. That’s awesome. That’s great. I really liked the combining the DAF with the Roth conversions, because that’s a big question we get is okay, I’m doing these conversions. How do I cover that tax liability? Should I use a HELOC? Should I use savings? Do I use it in my after tax stuff? But the DAF sounds like a clever strategy to, if it’s available to you, to keep more control over it.

Taylor: Yeah. And that goes back to, again, being proactive about this stuff. If you’re not prepared to do Roth conversions, you can be really caught off guard by a giant tax bill. So again, the earlier you start, even if you’re not going to start Roth conversions today, you might know what the projected tax bill is going to be in a couple of years when you do start, and you can start putting cash aside to pay those taxes. So you’re not scrambling at the last minute to liquidate securities or take money from a HELOC, God forbid, to pay those taxes. You can start to prepare for those tax bills ahead of time.

Steve: Yeah, that’s awesome. All right. Well, thanks for that color. So let’s jump into legacy planning. So first high-level question, what percentage of your clients end up with enough money where they have to be really thoughtful about this? Or I guess, how do you position legacy planning and who it’s for?

Taylor: Well, of course we want to start off this exercise with making sure our clients are taken care of, and they’re on a good track for retirement. That they’re confident in their own retirement plan. 99.9% of people want to know that, that their own retirement plan is safe and intact. Most of our clients have done a tremendous job of saving money. So through that exercise, they realize we don’t need all of this money. There’s no way that we’re going to be able to spend all this money to say most of our clients are in that situation. And then the question just becomes, well, what are we going to do? Right?

Taylor: Because if we don’t plan, if we don’t put a plan together for what is going to happen to this money, it may or may not align with your intention. So a lot of this just starts a conversation. And honestly, we’ll have the conversation in our office or over Zoom. And our suggestion is, go home and break open a nice bottle of wine and just sit and have this conversation with each other and start to talk about it. It’s a morbid thing, right? What happens when we pass away? But again, if you have more money saved than you’re going to actually use and need, we should develop a plan for it. And as you can imagine, someone who’s in retirement or retiring in the next couple of years has to be very careful about the amount of risk that they take with their investments. When you’re using your investments to generate income and create that retirement paycheck, we want to be careful about how much risk we’re taking, and we’re not in the wealth accumulation phase anymore. Well, by engaging in some legacy planning and breaking your money up into some different buckets, keep it simple and just say, “This bucket here is going to be invested for our children. Our children are going to inherit this money.”

Taylor: Well, you might invest that bucket more aggressively knowing that you’re not going to lean on it for your own retirement, that it’s actually for your kids. Or maybe it’s for a charity. “Hey, this bucket of money is going to go to our donor-advised fund, and we’re going to invest it really aggressively.” So just having this conversation and starting to think about that allows you to take more control over the different pieces of your plan and build a plan for them, so you can maximize that money that you worked so hard to earn.

Steve: Yeah, that makes sense. One of the things that I saw, at least with Michael Kitces’ work, was that for folks that are good savers, what your clients are, and have kind of built up that chunk of money when they go to retire, they actually don’t end up spending it. It actually keeps growing through their life. Do you see that, or do people actually spend it down?

Taylor: Yeah, it’s very, very real. It surprises me every single time. Again, I just said that just about all of our clients have more money than they’re able to spend, and almost every single one of them has this challenge of just enjoying the money that they worked so hard to save. So a lot of our conversation’s just begging them to go and enjoy retirement, and giving them the confidence to do that. But it is this kind of double-edged sword, because the people that have done so well at saving money and investing money, they have control over their spending and they have really good behaviors, and it’s hard to go from a saver to a spender. It’s just hard to change that behavior later on in life. And so it is this weird, just emotional, psychological transition that a lot of clients just really struggle with.

Taylor: Again, I think through some planning and earmarking certain dollars for certain things, and going through a really thorough retirement planning analysis and giving clients the confidence to go and spend more than they’re used to spending, or buying that vacation home that they’ve always wanted, or flying first class, whatever it might be, starting to show them that it’s actually possible can start to change their behaviors a little bit. But unfortunately, we’ve had a number of clients pass away. We’ve never had a client pass away with $0 before. I’m not saying it’s not possible. There are people that need to be very careful about outliving their money, but I think most people die with money in the bank, and most people at this stage of life are just are terrified to spend it down. So working through a plan and getting confident in what that plan looks like can make a huge impact. I mean, again, enjoy what you worked so hard to save for it.

Steve: Yeah. I think it’s important for people to kind of also look forward and visualize what their life is like. So 50 to 60 you’re one way, 60 to 70 you’re another way, 70 to 80 you’re another way, and 80 plus you’re a different way, in terms of what you’re capable of and what you’re going to want to do. And I think a lot of people are like, “Oh yeah, the future’s coming and it’s going to be like this,” but nothing’s guaranteed. And there’s people in our family that people… They get sick, or people pass away in your kind of network of folks that you know, and it’s like… If you knew that this was going to happen, if you knew you had limited time, you might behave pretty differently today. So you might be like, “Screw it, let’s take a bunch of cruises, or let’s go fly first class. Let’s enjoy it a little bit.” I think it is real, though. It’s hard to get people to kind of shift gears from that saving to spending mentality.

Taylor: Yeah. And again, going back to the charitable giving, a lot of people feel better about spending money on somebody else. You just have a hard time spending money on themselves, or they don’t really value big, fancy vacations, or expensive cars, or whatever it might be, but they’ve put a lot of value in helping somebody else. Now, again, charitable giving might fit into that and allow you to take the money that you’ve saved and put it to good work, so that plays into a lot of this.

Steve: Yeah, 100%. I think also intergenerational planning is going to become a much bigger deal for folks that have more money. But in general, when we get more productive and hopefully more wealthy as a society, there’s going to be more to kind of share out for other folks. Okay, so any other big considerations, like when people are doing… I mean, legacy planning… What are the big components that people should be thinking about and mechanically kind of constructing?

Taylor: Yeah. I mean, table stakes is to meet with an estate planning attorney, or if you’re a do-it-yourself type person, there are some great online estate planning tools where you can do this stuff yourself, but getting the basic documents in place. I know you had an interview on this, getting your living trust and will, and power of attorney, and having a letter of instruction on file. These are table stakes. These are the things that you should have in place. It’s amazing how many people come to us and just don’t have the basics dialed in. So first, I’d make sure you have that stuff dialed in. Second, even the people that do have that stuff, it hasn’t been updated in 5, 10, 15 years, and tax laws are changing. Estate planning laws are changing. Laws around your social media websites and pages have changed a lot, so we need to have those things updated.

Taylor: So go back to that attorney, get that stuff updated. And my wife and I just got done going through this in anticipation of our third child here. They’re hard conversations, and so her and I, literally, we spent the last few months having some of these really hard conversations about, “If we’re not here, if we’re not in the picture, what do we want things to look like?” And we met with our attorney, and we had a great conversation with her, and she gave us some things to think and talk about. And it took us a long time to sit and talk about those, and then we literally just typed them up in a document and then came back to the attorney to kind of formalize things.

Taylor: So I know it doesn’t sound very technical here, and I don’t know if you’re looking for a technical answer or not, but when it comes to legacy planning, a lot of it is you and your spouse, if you are married, really just having that conversation and identifying what’s important to you. What do we want to happen? Where do we want this money to go? Again, tax funding comes into play here, realizing some tax benefits today while you’re alive instead of when you’re not here at all. And so once you have a clear picture of that, getting the financial planner and the attorney back in the picture to put the pieces together would be the next step from there.

Steve: Roughly, what does this cost and how long does it take to kind of put these… I feel like a lot of people feel like they should do this. You mentioned when we talked with Cameron Huddleston about this, and she scared the heck out of me with what happened in her family, and how you need to have all this stuff together. And you know what? I still haven’t done anything. It’s just ridiculous, because I’m in this space. So it feels like a lot of people know they should do it, but life gets in the way, and then they don’t take action. So just cost and timing would be great to hear.

Taylor: Yeah, it surprises me to hear that. I hear that a lot too, that people know they should do it, but they just don’t do it. It’s just one of those things that they just kick the can down the road, and I don’t think it’s the cost that deters them. It’s not a really fun experience to go meet with your estate estate planner and put all these things into place. So my guess is for you, it’s not the cost. And for most people, it’s not the cost, because we work with a great estate planning firm here. They only work with people in California, so if you’re in California, feel free to reach out to me, and I’ll share their contact information with you, but you can get all this stuff done for under $1,000. They’re a great firm. There’s no fancy mahogany desks or anything like that, but great attorneys.

Taylor: They only focus on California, and you can get all this stuff done for under $1,000. If you have a really complex situation, it could cost 5, 10, 15, $100,000 for that matter. But for most of us, it shouldn’t really cost more than $5,000 to get all this stuff done. I think the biggest challenge is the time. We have to reach out to the attorney, we have to go through this exercise, we have to answer some hard questions, we have to think about death. Just not fun. So to me, even if you had to spend $5,000, this is some of the most important stuff you could be putting together. But instead, we like to talk about stocks versus bonds, and Tesla and Bitcoin, but we still don’t have a living trust and a will in place.

Steve: Well, I know. And if you end up having to go through a probate, which is what is going to happen if you don’t have this stuff put together, there’s significant tax and time implications where your family can’t get ahold of money. The government’s going to take, I think, like 10% automatically, and it’s a massive headache.

Taylor: And on top of all that, probate attorneys charge a lot of money. But just sit and picture your heirs, your children, your grandchildren, having to deal with probate attorneys just after you passed away. They’re grieving, they’re sad, they’re trying to get through this difficult time, and now they’re dealing with probate attorneys trying to go through all this. I don’t think that’s what anybody wants. So again, start to think about your heirs in this. And hopefully, that motivates you, Steve, to go and get this stuff done.

Steve: It does. Well, we’ve also had this idea of one-to-many, so maybe we’ll see if we can organize a class on it or something where we talk to your group and, “Hey, let’s just get a bunch of people and do it all together, because it’s something everyone should do.” But no, I appreciate that, and for sure. When you’re thinking about kind of legacy and organizing stuff, things that people need to keep in mind and resources they should consider… Because I want to talk about that and then get into kind of some user questions.

Taylor: I mean, I think we covered a lot there. Again, I would think about the ability to break up your savings and your investments into different buckets, and investing those for different purposes. Starting to think about if you do have children, grandchildren that you want to plan for, college planning, education, things like that, it allows you to maybe gather some tax benefits through it, but also just be more intentional about how that money is invested and what it’s for. Gifting versus inheriting, I know a lot of families will gift money on a regular basis, but inheriting assets allow for that step up in basis, if there are large capital gains that you don’t want to realize. Your heirs inheriting those get a nice tax benefit, so you might think about letting your heirs inherit assets versus gifting them while you’re alive.

Taylor: Now, there’s a lot of considerations there to think about, but again, I think it all goes back to… What do we want to happen in the first place? And then you can start to back into all these different tactical ideas. But in general, I think you nailed it with… Most people just don’t have the basics nailed down, so let’s be careful about talking about all the tactics. Let’s just get the basics nailed down, and have those hard conversations with our family. And maybe that’s the last thing I’ll say, is… I had a great person, I’m drawing a blank on her name. I had her on the podcast, and she talked about having these legacy planning conversations with your heirs. Have them in the room and talk to them about what you want to happen, what your intentions are, and what you’ve put together so that they hear it from you directly. I think that can be a really powerful conversation, too.

Steve: Yeah. I think one of the tensions I hear, especially for people that have… If they’re in the situation where they’re thinking hard about this, they tend to have a lot of money. And then one of the tensions is yeah, I want to be intentional and want people to know what I wanted, but I also don’t want to clue people in that, “Hey, you might become financially independent at 30 if…” I have a trust question for you. And does that affect the psychology… It’s mostly their kids. That, “Oh, I’m 20 years old, but if this happens and I inherit a bunch of money, then I might have to work super hard.” And I think that people that tend to have money tend to be success-driven. They want their kids to be successful, and it’s all about values and hard work, and they don’t want to take that away from their kids.

Taylor: Yeah. No, absolutely.

Steve: Is there any way to bridge that, or people just kind of talk, “Hey, generally this is how we’re thinking about it. Here’s the values, but you’ll know more about the money later?”

Taylor: I think there’s a lot of ways you can go about doing that. There are ways to kind of control your assets from the grave, putting things into trust. The great thing about a trust is that you can create your own law, essentially. You can literally write whatever you want in that trust. And so if you set up trusts for your heirs to inherit, these are irrevocable trusts when you pass away, so no changes can be made to them. What it says is what’s going to happen, and it does allow people to control their money from the grave, and dictate how the money is being spent and when it’s being spent. So there are certainly ways to go about doing that, but that also causes other issues too, frustration from your heirs, or paragraphs or sentences inside the trust that can be interpreted different ways. And so there’s a lot of considerations there.

Steve: Actually, this is the first question I had from a user, which is Laurie M., was… My question is, when does it make sense to set up a trust?

Taylor: I think it varies state by state. In California, most people need… If you own a home, you should have a living trust. I don’t care if you’re 30 years old or 70 years old. You should have a living trust and these basic estate planning documents set up. Again, it just allows you to tell the court what you want to happen with all of these assets. Because if you don’t, then again, probate comes into play, and the courts will decide what happens to your money. So in California, most people should have a living trust. In some states, not necessarily true, but I’d say if you have assets, net worth over $100,000, you own a house, you have some investment accounts, you should have a trust. And again, it doesn’t cost very much money, and you get to just kind of write your own letter of the law. Here’s what I want to happen. So it is state by state, but I don’t know what. Not an exact age or science to it.

Steve: Yeah. No, no. That’s good to know. I mean, I think for a lot of folks, they hear trust, and they are like, “If I have 3, 5 million bucks I’ll think about a trust.” But sounds like no, you should be really thinking about it at a much lower level.

Taylor: Yeah, it is a broad term, right? Like there’s like a basic living trust for you and your spouse. And you put your house in the trust, and you put your investment accounts in the trust, and your checking accounts in the trust. And again, you’re just doing that so that when you pass away, the courts, the executor, knows what’s going to happen to all of these things, right? How it’s going to be split up exactly. There’s no question about it. You can get into really advanced trust planning like we were just talking about controlling money from the grave, and breaking into multiple trusts, and kids inheriting trusts with certain law. It can get really complex, but just basic, basic living trust will, advanced medical directive, like most people should have that into place.

Steve: Okay. Well, actually this leads into the second question, which is the more complicated situations. One of our members, John R., “What are the pros and cons of estate distributions based on age or life events?” So 21, 25, 30, 35, graduate high school, graduate college, get married, have a house. I know some people have triggers, like you talked about making rules, that they don’t want the kids, if something happens, to get a bunch of money when they’re 21 years old, for instance.

Taylor: Yep. So again, yeah, one of the benefits of having a living trust, you get to make up your own rules. You can choose any age you want or certain life events or whatever it might be. And like John mentioned, there are pros and cons to doing this. And I think, first, it’s what are your intentions? I hear from some families that say, “I want my son to have a hundred thousand dollars, I don’t know, at a certain age. I don’t really care what he or she does with it. If he wants to go buy a Lamborghini or go invest it in Bitcoin. But whatever, I don’t really care.” That’s one thing. But there are others that say, “I want my child to have this money to start a business, or to buy their first house, or to pay for their wedding.” And they want to create some rules around that. And it might not also be a lump sum. It could be income, right? It could be a certain amount of income each year or income from the investments. I mean, you can spin this a thousand different ways.

Taylor: So I think one of the pros is that you have control over what happens to that money, that they’re not going to go blow it on something that you may not value. But the con is just that too, that being controlled by somebody else doesn’t always feel really good, right? Someone telling you what to do with this money. It’s not your money, but it can certainly create some friction in some households and some frustration. Also, again, sometimes these things are not written super clearly. I’m struggling to think of a really good example off the top of my feet, but sometimes it’s just really kind of broad and it can be interpreted different ways. And it’s really up to the trustee to finalize that interpretation. So you may not agree with the interpretation. It may not have been written really clearly. And you as the beneficiary might start to get a little frustrated.

Steve: Sure.

Taylor: So yeah, there are definitely pros and cons. I do think in general, most people do put an age, at least, on kids inheriting money. I don’t think a 16 year old needs to inherit sizeable amount of money at that age. So yeah, having some basic things into place seems to be pretty common.

Steve: Okay, great. We’ve got a couple other Roth questions. So one is from David C. “How to determine if an early retiree should take advantage of ACA premium tax credits or do Roth conversions?” Do you see people making those trade-offs?

Taylor: Yeah. It’s kind of a big conversation. Again, I think it goes back to your current tax bracket, your future tax bracket, the actual benefit of the Roth conversion, how much that is. There’s so many things that go into play here. I don’t have like a really precise answer for David. I’m really sorry.

Steve: Yeah. Well, we can’t do everything for … I mean, this is why people end up working with experts like yourself because, hey, their situation gets very detailed. But appreciate that.

Taylor: Yeah, the challenge with a lot of tax planning that you’ll find out is you pull one lever over here and it impacts something over here. And then you do that over here, and it impacts this over here. So you really do start to make sure all these things are aligned. But one thing I will note is that some people do get hung up on if I do a Roth conversion, then my Medicare premiums are going to go up by a couple hundred dollars or 500, whatever it is. To which we might say, “Well, look. Over your lifetime we’re going to save, I don’t know, $300,000 by doing these Roth conversions, but you’re worried about a couple hundred dollars increase in your Medicare premiums.” So sometimes just kind of talking through the benefits and quantifying them can help people come to an answer there.

Steve: Yep, 100%. So here’s a question from Jolene B. about living overseas. So I don’t know if you have experienced with this but, “What records should someone keep when making Roth conversions when considering moving to another country that recognizes the Roth, or has non-habitual visa scheme?” This might be out of your wheelhouse.

Taylor: Yeah. Yeah. It’s a little over my pay grade. We don’t do much with international stuff, but wherever Jolene currently lives, or pays taxes, or wherever she’s a legal resident, she’d want to make sure that she works with an advisor and a tax expert in that area because it varies by region. So I would just say wherever you’re a legal resident, make sure you have a really good tax expert in your corner to help you navigate some of this stuff because yeah, it can get pretty complex pretty quickly. So unfortunately, again, Jolene, I don’t have a great answer for you. I’m sorry.

Steve: Yeah. All right. Last question here from Chris S. “It sounds like the majority of CFPs are focused on the asset building portion of our lives,” which we talked about. “How do you find a tax advisor who has the ability to give decent advice on the post retirement end of things?” I mean, is there some membership group or network? I mean, there’s yourself clearly.

Taylor: Yeah, it is tough because a lot of financial advisors, again, like I said, at the beginning of the show, they want to work with everybody. And so you don’t find a lot of specialists, people that only work with retirees and the decumulation phase of life. Chris asked specifically about a tax advisor. It is possible to find a tax expert, not even a financial planner or a CFP, but a really good CPA potentially that helps with tax planning. It is, again, really challenging to find really good CPAs that are proficient in tax planning. Most CPAs just do tax returns year over year, and they do it for a thousand families, and they don’t have time to do really nuanced tax planning, but a tax attorney even potentially. In terms of resources, I think, honestly, the retirement podcast space, there’s a handful of us retirement experts that have podcasts.

Taylor: So you might do some searches through the podcast apps and find some more retirement podcasts. Again, many of us, own firms and work with people directly. But there isn’t a network that I’m familiar with, although napfa.org, N-A-P-F-A, it’s a network of fee-only advisors. So advisors like myself that don’t charge commissions or anything like that. You can filter for certain types of advisors, so you can choose exactly what you’re looking for. And it’ll pull up people that specialize in those things. But you also run into advisors that have checked every single box, and no matter what you check, they’re going to show up. So you’re going to have to introduce some people and do some due diligence and make sure you’re finding the right person.

Steve: Right, I hear you on the podcasting thing. I think podcasts are excellent, because you can kind of hear from the folks and judge for yourself if these people know what they’re talking about and do they have the experience that’ll be useful to me. All right. Well, look, as we wrap it up, just some quick questions, anything you want to share with our audience about kind of what’s next for you, how you see building your firm going forward?

Taylor: Yeah. Again, we work with about 70 families around the country. Ideally we want to add another 50 or so families to the firm. We’re a low-volume firm. We’re not trying to be the next Morgan Stanley or anything like that. So we’re just very intentional about the clients we take on. They become like family to us. So we’re just very careful and grow slowly and intentionally. So we’re looking forward to taking on another 50 families or so, and I think we’ll have a really good specialized business from there. So for me, I’ve done a lot in the last 15 years of my career, and I really just want to spend time with people that really me and value my expertise and we have a good relationship. It’s just not really about dollar signs. And so, just getting really clear on who we do our best work for and just really helping those people is what we’re focused on.

Steve: Yeah, fair enough. I think that’s a great answer. I think one of the challenges is that frankly, there’s there’s a huge need for this. There’s just not enough people that are really awesome at it. And it’s hard to do, like I’ve talked a lot with Dana about this. She does amazing work, but it’s friction-full. It takes a lot of effort and thought, and so you can’t do it at scale. And that’s part of like … I’m not trying to toot our own horn or anything, but like that’s part of what we’re trying to think about is, can we help, at a baseline level, folks kind of at least build awareness about some of the things they should be thinking about? I still think there’s a need for many more folks that are experts at this.

Taylor: Yeah. I mean, I think there are plenty of experts out there. I know it can be a little tough to find, but they’re out there. I think the one thing I would say, and this is not a sales pitch for us or our services or anything, but at some point you have to ask yourself, “Is this really how I want to spend my retirement? Is this really how I want to spend my time, navigating tax planning and managing my investments, even for that matter, in retirement?” What’s really important to you? It might be interesting. I promise you, 99% of our clients are extremely brilliant. They can do this stuff themselves. They just kind of figure out, “That’s not really what I want to be doing at this stage of life.” So it just might be one of those things that you outsource, but you do have to get over delegating that, and delegate it to somebody else and letting them do it. And it does cost money, which is another hurdle for some people.

Steve: For sure. All right, just one quick question for you about kind of like …. Maybe you don’t think about this that much, but do you think about kind of the near term, like the next couple of years? Do you think that we’re going to … It feels like the world’s changing a little bit, we’ve gone through COVID, we’re seeing a huge amount of capital out there, asset prices are increasing. Do you kind of have an opinion about where things might be going in the economy? Or do you already kind of like, “Well, look, just bet on the US economy. It’s going to work out fine,” and not think about the near term or the tax bill stuff too much?

Taylor: Yeah. Our guiding philosophy is to focus on the things we can control. And there’s not a lot that we can control in the day-to-day markets, and the economy, and what the Fed’s going to do with interest rates. It’s interesting to pay attention to, and keep your finger on the pulse, but we don’t have a lot of control, and we don’t have a crystal ball. I was speaking at a conference just before COVID, and I was on stage speaking to a group of financial advisors. And I was talking about stress testing your investments against a catastrophic loss, comparing it to ’08 or ’09, making sure you know how much risk you’re taking in your portfolio. And I had an advisor jump up and start to kind of heckle me from the audience saying, “What are you talking about? The economy is healthier than ever. There’s no catastrophic event around the corner, people should be taking more risk.”

Taylor: And then we leave that conference and what do you know? A pandemic that nobody could predict happens and the stock market drops 34% in just a matter of days. So we can’t predict things on the upside. We can’t predict things on the downside. What I do know is that even if you’re retired, you’re age 65 today, you still have another 30, 40 years ahead of you. And I do know that over those 30 or 40 years, I feel very confident that things are going to be moving up into the right. So if you can stay focused on those things you can control and try to to mitigate the noise out there, I think you’ll sleep much better at night and you’ll be much more successful at the end of the day

Steve: 100%. No, that’s the exact right message. Focus on the long-term, and kind of forget the noise, and that’s who’s successful. All right. Well, look, Taylor, this was fantastic. Really appreciate all the insight on tax planning, and legacy planning, and some of the strategies you shared. We’ll put up some links we talked about. So with that, we’ll wrap it up.

Steve: So thanks for being on our show. Davorin Robison, thanks for being our sound engineer. For the folks listening, appreciate your time, hopefully you found this useful, and if you’ve made it this far, definitely check out Taylor’s Stay Wealthy in Retirement podcast. And you can also check out our site at NewRetirement.com or our group in Facebook, which is growing pretty fast. We just went over 5,000 people, where people kind of just talk among themselves. And there are also experts in there, asking and answering questions. And then, finally, any reviews for my podcast or Taylor’s podcasts are always welcome. Feedback is good. Helps get distribution out there, and with that, thank you and have a great day.

NewRetirement Planner

Do it yourself retirement planning: easy, comprehensive, reliable

NewRetirement Planner

Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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