How To Avoid Having A GOOD Financial Plan And BAD Early Retirement

What I mean is there are people that say , ari , how do I have the best plan ever and follow all of these tips and strategies to the best degree I can ? I say you don't really want to do that . They go . What do you mean ? Isn't that like exactly what you talk about ? Is that why you do the podcast ?

I go , I do all of this so that you can live your best life , but not best life on paper or best life on a spreadsheet . It's really common for advisors I've seen to go here's the tax strategy you need to go implement , here's the best investment strategy .

But if you're not sleeping well or if you're foregoing taking a river rafting tour that I just talked about with a client of mine an hour ago , but before you know implementing a tax strategy or instead of implementing a tax strategy , should I say , then you're doing it wrong . The reality is go live your best life .

Don't just say , hey , how do I have the best life on a spreadsheet , because a lot of people will save and invest to the point going Ari , I'm doing all the right things and I go . If you keep doing what you're doing , your plan is going to look awesome , but your life isn't , and so it's .

How can you align the two to the point where , of course , you don't want to run out of money , but you also don't want to look back and go wow , I've got millions of dollars . I wish I did spend a whole lot more . I wish I did all of these things while I had my energy and health , because that's a big reality .

Most people don't want to stop and look at because it's easier to just keep working . It's easier to move the goalpost and go . You know what I said I need two million bucks . Nope , I need five . Once I have five , I'm good to go . Once I have 10 , I'm good to go , and it's really easy to do that and I don't want you to do that .

So today I'm going to talk about the real risk and a framework so that you don't invest too well , which I know . It's even weird maybe here , in that we want to invest really well for our clients when they have strict goals and intentions that they want to accomplish .

And for those that are just investing for the sake of investing , that's where the danger comes . And so the review of the week then I want to go over . First of all , coming from Jackson , and Jackson says Ari , appreciate the content and love that , it's anti-fluff .

You hop right into the content , go over review and fun stuff comes after that I say you're welcome , jackson . Jackson goes on to say I want to make sure that I don't leave anything on the table , but I also want to make sure that my spouse is okay . Do you have any other episodes addressing that she doesn't like money ?

I'm going to imagine , jackson , she does like money , but she doesn't like talking about money , because a lot of spouses don't . And yes , I have podcasts that talk about that , but I would point you towards a YouTube video of mine that talks about how to make sure your spouse is okay , and a lot of you that reach out to me .

You're probably the maybe not the breadwinner all the time , but you are the person that's kind of spearheading , if you will , the financial aspect of your plan for your family , and so it's really hard to involve family members because either they go Ari , 401ks are boring .

Or in this case , if you're listening , jackson Jackson's going , ari my wife says 401ks are boring and she doesn't want to talk about compounding and she doesn't want to talk about taxes . I get it , but what she does want to talk about is what excitement she's looking forward to in retirement .

And so , for example , I'd say what are you most excited looking forward to ? And she might say I can't wait to be able to spend more time with grandchildren . I say great , how much would you love to go take in trips with grandchildren ? And she go oh , my gosh , I'd love to do that . Maybe you know how much would you want to spend ?

And they go I don't know , maybe 20,000 a year . That would be awesome . It's a great . This is what our 401k can support , if that's what we want to do . And they start to get a little bit more interested . But too many people start with hey , you know , babe , my 401k is at this level , isn't that awesome ?

They're like I don't know if that's a lot or a little , but I don't want to run out of money . And now you're just making me think about this . I'm actually more stressed than if you said nothing at all .

So I know a lot of you are probably even laughing hearing that , but the reality is a lot of these conversations are not effective and you either need a planner to help facilitate them or just a different Framework .

So , jackson , I would point you towards towards excuse me my video on YouTube where I talk exactly about that and how to have that Conversation , how to frame it . But for today's episode , we're talking about what if you do invest too well , and how to make sure that you don't . And the short answer is Understand .

You know what you want to spend and have a plan that accounts for that . But it's almost so high level that people go . I kind of already know that like , okay , I want to spend , call it , five thousand a month , but then I want to spend a little bit more during my earlier retirement years , while I have my energy and health .

Then maybe it's gonna shoot back up a little bit , maybe it's gonna shoot back down and then at the end maybe it's way up with medical expenses . Or you know what ? I know I could have spent more , so I'm giving more at that time . There's a lot that goes out on your head , but here's how I want you to think through it .

I don't want you to just do what's known as Roth contributions forever . Now , I love Roth IRAs a lot of people love Roth IRAs , but I don't love any investment account . I love whatever makes most sense for your plan . And I find a lot of advisors get married to Roth , and here's why Roth accounts you put money in . A lot of you know this .

It grows tax-free forever . So you don't get any benefit immediately today , but the growth happens tax-free forever . So some people go , oh my gosh , that's amazing .

I mean I want everything in Roth , but you could actually have too much in Roth accounts or you could have all of your money in Roth accounts to the point when it actually would defeat the purpose , meaning you kind of invested too well . And here's what I mean by that . You actually want some pre-tax accounts .

Now when I say that like a 401k or an IRA , I can hear a lot of you already going . Ari , you just did an episode a week ago or two weeks ago about RMDs and how , if I save and invest really well in my 401k and IRA , I'm gonna have these big RMDs . I don't want that . I need to protect against that . I say you're right , but we don't want none .

Meaning we don't want zero in pre-tax accounts , and here's why the standard deduction , if you're married , filing jointly , is 27,700 . So if you had a million bucks in a Roth account and you were pulling 4% per year , that's $40,000 . 4% of a million bucks 40,000 . Simple enough . That's tax-free . It's all Roth . Now you paid a price for that .

The price is you are forgoing tax savings in your working years . I mean , you're working . You went , hey , I'm gonna put money into Roth because it's gonna benefit me more in the long term . So I'm gonna say , hey , I'm not gonna worry , I'm gonna eat some vegetables now and I'm not gonna have to eat those later . That was the thinking with Roth .

Now what if you have a million bucks and let's assume 65% of it is pre-tax ? Okay , you have a million dollars . 650,000 is pre-tax , 350,000 is Roth . Well , if you pull a proportionate amount of pre-tax and Roth for that same 40,000 , here's what it would look like . You could take out 26,000 pre-tax and 14,000 Roth for a combined 40,000 .

What are the taxes on that 26,000 ? You guessed it zero . You have a standard deduction of 27,700 . So , excuse me , not exactly zero , but you get the point here . The message is the same . Pretty much all of that is tax-free . And guess what ? You got a deduction when you first contributed those dollars .

That deduction is really powerful because during those years you need some tax savings . Maybe cash flow is tighter . So , yes , can we do Roth ? Yes , it's helpful , but at the same time I don't want you looking at pre-tax going , hey , I'm only going to do that entirely . Of course , everyone wants Roth because it's tax-free income in retirement .

But what you want to do is so how can we get tax-free income most efficiently along the way , and for a lot of my clients they have called it 25 , 30% Roth and it's kind of the sweet spot . Other clients , they've got 50 , 60% Roth , and that's their sweet spot . It's can we find the right balance there ? And less so about all Roth or all pre-tax .

So a very basic analysis is what I want you to do . Not , of course , right now listening to this , but back your head , thinking through . Let's look at what I'll talk that vacuum planning concept . I could talk about how much income you need . I could talk about taxes .

I could talk about investments , but if I'm not connecting all the dots and making a holistic plan , you're going to have a great recommendation in a vacuum . But I'm anti-vacuum planning , I'm all about holistic planning . So when I look at this , I go what is Social Security projected to be ? Do you have a pension ? What are dividends ? Do you have interest ?

What other income sources that that standard deduction would be applied against ? Because the bottom line is oftentimes being all Roth could actually cost you more and actually hurt you . And so what I want to do is say look at your plan , look at your moving pieces . Does it make sense to be all Roth or will that actually cost you more ?

Would it actually benefit to not do all Roth but a portion ? And so here's some context . Let's say that you're saving I don't know , let's just use round numbers 10% . You're saving 10% to your Roth 401K . Now , your Roth 401K , as a reminder , it's like your Roth IRA but it's at your employer . So the max this year is $22,500 .

You could do the catch up and put $30,000 towards that , but your employee they're matching 5% and your employee is only matching on a pre-tax basis why they want a deduction for that . So let's assume you build a million bucks and you grow and grow and grow , and so a third of that would be pre-tax . Okay . So just some context .

This is just a basic example here . But let's look at tax planning with this million dollars . So If you're in the 24% bracket now , tax brackets are going to change . But today 24% tax bracket you're going to immediately retire . Let's say , hypothetically , next year you might be in the 12% bracket .

So if you save $10,000 to a pre-tax 401k today , that's going to save you $2,400 in federal taxes . 24% is your current tax bracket . You save $10,000 . 24% of that $10,000 is $2,400 . Now if you retire and you convert that $10,000 to your Roth , it's only going to cost you $1,200 to do so .

So there's some tax savings to getting pre-tax deductions in years where your income is high , then paying taxes when your income is low .

So to summarize that basic example right there , I'm often advising yes , do a pre-tax deduction , because right when you retire you're going to be in a lower tax bracket and then you can convert , take advantage of the deduction , get a little bit of the best of both worlds .

So there's tax savings to getting these deductions once again when you are in a high income year and then maybe in the future you're in a lower income year and you do other tax planning . Well , here are some two follow-up questions that I'm often asked in this example is how do I know how much room I have in that 12% bracket ?

So if you're married , finally , jointly taxable income is between $22,000 and $89,450 , meaning that's what you're taxed on up until 12% . Call it 12% , that is anything in that range . You are taxed at 12% .

Excuse me , if you're at hypothetical here , $30,000 of taxable income and taxable income , as a reminder , you have your adjusted gross income , so all your different income sources minus your deduction . So if you make $100,000 , maybe you put $20,000 to a 401k , $80,000 , that's your taxable income .

Well , in this example , if $30,000 is your taxable income , you still have $59,450 before you jump into the 22% bracket . So that's $89,450 minus the $30,000 of taxable income . So now you go okay , I've got a little bit of room , I've got a little bit of space , if you will , to jump on this trampoline before I fall into the 22% bracket .

So , hypothetically , if you're at $89,000 of taxable income , you're in the 12% bracket and if you make even $450 , that little jump it's going to put you into that next 22% bracket .

So what I'll often advise with my clients is I won't say just where tax brackets going to go , I'll say what tax bracket are you projected to be in , based off your different income sources , and what does that mean for what we should do today ?

Do you need to do $25,000 of conversions for your plan Because maybe you could do that and stay in the 12% bracket ? Or do you need to do $250,000 of conversions Because if you don't , you're going to have these big RMDs ? So find out for yourself what tax bracket you're in today , fairly simple when are we going to be in the future ?

And I , of course , use tax software to do that , because it's not just about doing it easily , but most effectively , because if you do anything wrong in there , then all of a sudden you look back and go , wow , I could have saved tens , if not hundreds , of thousands through good planning .

Now I like to give this example , because this one resonates with a lot of clients , and I know a lot of current clients listen to the podcast as well . So if you're here in this example again , I apologize if you're not a client , you probably haven't heard this quite yet . But the timing of contributions is important .

Let's assume that you invest $10,000 a year from age 20 to age 60 . That's going to give you $2.6 million , assuming the growth that I'm projecting here . Now , if you do half and half , meaning half in Roth , half in pre-tax does that mean that you would have $1.3 million in Roth and $1.3 million in pre-tax ? It depends on timing .

And this is where this gets fascinating . Let's assume from age 20 to age 40 , you do all Roth . Okay , from age 20 to 40 , all Roth . Then from 40 to 60 , the next 20 years you do only pre-tax , but you still only do $10,000 a year .

What would happen is it wouldn't be 1.3 Roth , 1.3 pre-tax , even though from 20 to 40 , those 20 years you did only Roth , and from 40 to 60 , you did only pre-tax . Instead of 1.3 , 1.3 , to add up to 2.6 million , you would actually have 2.13 million in your Roth and 470 in your pre-tax .

You'd have a whole lot more in your Roth and that's because of the timing of contributions . So more often than not it says , hey , let's absolutely do more to our Roth in the early years , then maybe shift in our years where there's higher income to do pre-tax . Can we assume the same income and tax bracket forever ?

No , you don't know what raises you're going to get , you don't know exactly what lifestyle is going to look like . But really to do this justice and look at okay , am I doing the best I possibly can do the analysis to show what are the tax savings in those pre-tax contribution years and if you invested those , how would those perform over time ?

So that's where I'm going over for that . Now a quick summary on charitable giving . Not , this doesn't apply to everyone . So if it doesn't apply to you , there's the last thing I'm going to leave you with for today's episode . So feel free , as always , to tune out .

Sometimes my job is to say , hey , listen to this if it's helpful , don't listen to this if it's not . I want to make sure you're getting the content that you want . So , as always , you can reach out to me if you want a custom strategy in the link below . But with charitable giving , here's what I want you to think about .

If you do a lot of charitable giving , then it likely makes sense to do fewer Roth conversions . The reason for that ? Roth conversions can be great , but they cost mula . That's right . They cost money and they can save you a lot of money , but there's an upfront investment to do them .

A qualified charitable distribution allows you to view your IRA as part of what's called a donor advised fund in a sort of way . Here's what I mean by that in plain English A donor advised fund . It gets you a big deduction if you put money in .

So if you're like Ari , I give $10,000 every year but I don't really take a deduction , because I just take the standard deduction , because that's bigger than if I itemized , I'd say great , do you want to keep doing 10,000 year of giving ? They go , yeah , I do , I go . What if we took one year and we don't need $100,000 to a donor advised fund ?

You go okay , I'm listening , why would I do that ? So you get a big deduction in that year and that donor advised fund is like your own charitable giving fund . You can now give from that donor advised fund at $10,000 every single year and it can grow for you .

So you've got a big deduction and you actually get to take value from those deductions , those giving that you're doing every year for really the first time . You get to benefit yourself more and you get to benefit the institution more because that $100,000 can be invested for growth .

So as I look at it , I want to make sure if we're charitable giving , if that's important to you , you're making those gifts to the charity of your choice , you're getting the biggest tax benefit and they're benefiting the most . With an IRA , you get a deduction .

If you put money in , it's invested , it grows what's known as tax deferred and then in the future you can make gifts to a charity of your choice and there's no impact to you . So if legacy planning is an important aspect of your plan , you're going all right , I've got a million bucks and I want to leave 500 to a charity and 500 to my kids .

Should I just do 500 each ? And let's assume you have an IRA and a brokerage account ? No , don't do 500 each . What you'd want to do is put 100% of what you want to give to charity in your IRA and 100% of what you want to give to children in your brokerage account .

The reason for that is you don't want your kids paying any more in tax than they need to and you can fully leave everything to the charity . They don't have to pay tax on it like your child might . So charitable giving can be a big aspect of your plan if that's important as well .

So to summarize here I don't want you to have the best financial plan on paper . I want you to live the best life . And I had a client that said Ari , I'm debating not taking this big trip to Europe and the reason for that is because I want to make sure I am absolutely getting the most out of my Roth conversion strategy .

And I said I didn't explain myself well , because if we're forgoing these big trips or doing some fun stuff solely for tax purposes , the reality is we're not doing it right , because you don't look back on your life and go Ari , my average return was 8.326497% . I'm so happy you go .

No , look at all the amazing stuff I was able to do because of good tax strategy , because of good investing . I could spend more time with family , I could take more trips . That's why we do this . It's not simply for investing's sake or tax's sake . It's how do we get actually the most out of our plan ?

Well , it's by living the best life , and I'd rather you not implement the best conversion strategy . Still implement a good one and go live the life you want to live . So hope that this has been helpful . Love you guys . As always , thank you for your content and just submitting your questions . I appreciate it more than you know .

The podcast has now reached over 250,000 downloads , which I cannot imagine . If you told me that six months ago or a year ago , I just would not have believed you . So amazing , it's really become the number one hub for early retirement content , thanks to all of you . So if you haven't already , please do leave a review .

It helps more than you know and if you want a custom strategy , reach out to myself and , of course , I'd love to help you build that . Have a good one , guys . See you next Monday . Thank you for listening to another episode of the Early Retirement Show .

If you have a question that you want answered in a future episode , you can always go to my website , earlyretirementpodcastcom , and you can go ahead and submit a question that I'll look to answer in a future episode . Thank you all for listening . Please do rate it , review it and share it with someone who you think would benefit from this information .

If there's anyone out there that you know , I certainly appreciate it and I will see you all each week . Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice .

Consult with your tax preparer or financial advisor before taking any of the information or financial advisor before taking any action . This podcast is for informational purposes only .