A lot of you guys know this , but I'm obsessed with an early retirement , not because of this idea that you're technically retired early on paper , but I want you to do more of what you want to do with your time . That's what it's really all about .
It's very rare that people look back and go Ari , I'm so glad my average rate of turn over my whole life was 8.32 , 649% . No one says that they go . Yep , I was able to retire early and spend more time with family , or yep , that job that was not healthy for me . I was not taking care of my health in that role .
I switched to something and , yep , it doesn't pay the same , but wow , am I happier . And that's what financial planning , in my eyes , is really all about . It's not about dying with the most amount of money . It's about getting the most out of that money .
And today I'm talking about one of the ways to do that , which is please , don't pay more in taxes than you need to . I am recording this episode right after I just had a conversation with a client of mine and they said Ari just so you're aware I know you mentioned this in a previous episode because a lot of my clients listen to my podcast .
They say , ari , I hired you because of the tax planning . That was not happening with my other advisor and I know that that can make a big difference to the bottom line . I go that's correct . Is that why you still pay me ? They go no , ari , I pay you because I don't want to have to do it .
I feel like I know a good amount , but I also feel like I know enough to be dangerous and I want to be with someone for the rest of my life . I said great , I love working with you . But then I thought about it more and I went .
I know I've done a lot of episodes talking about tax planning and conversions and healthcare subsidies and all these things , but I want to simplify it and give you a framework about how to maximize tax opportunities If you want to retire early .
Quite simply , not because all of you are going to do exactly what I'm about to say , but a lot of you do want to make sure you don't pay more in taxes . And you're going okay , ari , even if I'm not going to absolutely follow everything you're about to say .
I want to know , like , what would I have to do if I wanted to have a quote on quote perfect early retirement where I don't pay more in taxes than I need to . So I'm going to give you that framework today . But , like I said , it was sparked from a conversation I just had with a client .
And if you all want to hear more about what it's like working with me when people talk about my tax planning , just go to Google and look up root financial partners and you will see what people have said about working with me .
Because , to me , tax planning yes , I'm obsessed with this stuff because if we can use numbers to live a better life , that's what it's all for . In addition to that , today's episode was also prompted so not fully by this client conversation , but by an email I received , and the email is from Henry , who says Ari , I don't like paying taxes .
I think you can help with that . What do I need to do to pay less taxes ? 64 and in good health ? So , henry , I like the straightforward aspect to that and I'm going to walk you through how I do it . Here's the first thing . Okay , number one do you have cash to live on ? Let's pretend once again , giving you examples and assumptions is how we do this .
Well , in my opinion . Let's assume you're 60 years old , you want to do everything in your best power to make sure you don't pay more in taxes than you need to . The first thing is how much do you have in cash ? Is that actual cash , meaning it's cash sitting in a bank account ? Is it in a high yield savings ? Is it really an emergency fund ?
We're like , all right , I'm really not going to tap into that because it's earmarked for if something occurs . Is it all in a brokerage account ? Is that brokerage account invested ? Well , oh my God , ari , you just spit out five questions . Let's go a little slower here . Okay , I get a little carried away , but here's how I want you to think through this .
How are you defining the cash that you hold ? Some people say , Ari , I've got 20,000 bucks and I'm never touching that , no matter what . That's my safe assets . I said great , are you open to investing anything above 20,000 ? They go absolutely , because 20,000 , that's the minimum . That's my quote-on-quote sleep number that allows me to sleep well .
Anything above that , I'm good to do whatever makes most sense for the plan . Say wonderful , why don't we invest that and get some good growth on it ? And they'll go , ari , I just don't know , because I might need these funds , I go okay , then let's really define . What is that sleep number ?
So this is an example of me really asking yourself , all of you , right now . This is a quick homework assignment . You can do it in two seconds because it's not a scientific answer , it's a gut answer .
What amount at all times do you want in your portfolio that you're like Ari , I'm never gonna touch and I'll reframe it because not investment or retirement portfolio of all your financial assets ? What amount do you want in your bank account so you never have to worry about going below that , where you're like , oh my gosh , now I'm uncomfortable .
Let's say it's 50,000 , okay , so 50,000 bucks , that's what's gonna , you're always gonna have that . That really means anything above that could be invested . Now , it doesn't mean you wanna invest it all the same way In fact you don't . But if you have a Roth IRA , you wanna maximize that growth . That's the account you're touching last .
Okay , so we want the tax-free growth happening there as much as possible . Then you have an IRA okay , think about that like the middle account . Then you have your brokerage account . The brokerage account is the best account if you wanna pull assets and retire early and pay the least amount of taxes .
Now , if your portfolio is all stocks let's just type a hypothetical here in one year of cash is what you have outside of your portfolio . Then you just have one year of cash .
So , basic example let's pretend you have a portfolio and just think across all your accounts it's 60-40 , meaning 60% is equities , 40% is fixed income , as an example , and you have an additional one year of cash outside of your portfolio . Well , the people would say all right , I just have one year of cash . I would say you don't .
You have 60% equities , you have 40% fixed income , cash alternatives . I would lump that in to say that 40% , at least partially , is cash . I'm gonna imagine a portion of that . So really it's not one year of cash . Maybe you have two years or three years or four years .
And so the first thing I ask people is when we're going through retirement planning and projections and how much you wanna spend and how to save on taxes . I want them to understand your portfolio is meant to be lived on .
Okay , it's more than just an emotional adjustment , but for a lot of people it is that it's oh , my God , I've been saving , investing to this 401k , I'm gonna be retired already . I'm gonna have a really tough time pulling from that account because I'm no longer gonna have new dollars contributed there , and that's right .
If your portfolio is declining , you should still be able to make withdrawals if you're invested the right way . So the question is at what point do you start drawing down cash ? At what role really ?
What role should cash play in your portfolio If you have a strategy for your portfolio , meaning a very intentional amount is allocated to cash , a very intentional amount in bonds or stocks , rebalancing as you should , not on a cookie cutter basis , and I'll give you a basic example of this . Some people say Ari , an advisor reach out to me .
They say Ari , how often do you rebalance ? I do it every quarter . That's what they said . I said I don't believe in any rebalance schedule . They go aria . That seems to make no sense at all . They go , so do not rebalance . You know , bi-annually or once a month , like how do you do it ? I go , it completely depends . They go aria .
This is like the least helpful conversation I've ever had on rebalancing . And here's the point I was trying to get across to this advisor is let's pretend you have a 60-40 portfolio and let's pretend that the 60% so the equities goes up by 10% and now it's worth 70% , and the 40% ? It's gone down 10% , so now that's worth 30% .
So you had a 60-40 , now you have a 70-30 . That is saying , yep , let's do a rebalance to come back to the appropriate mix based on your goals .
Okay , but let's pretend six months goes by both are fluctuating the equities and fixed income and then six months later it's still exactly 60-40 because it went up and then it went back down and then went up and went back down again . Now we're back at 60-40 . Some advisors would still go do a rebalance because they do it bi-annually , no matter what .
I would say why do it ? Because nothing's actually changed . Other people will say I only rebalance twice per year , no matter what . And I'll say sometimes for clients , I'll rebalance 12 times in a month . They're like why on earth would we do that ?
Well , what if you have , for example , an 80-20 allocation and , because the markets performed all different ways , you now have a 95% , 5% allocation ? You're like Ari , oh my gosh , what's going on here ? We might need to do a ton of rebalancing .
So the idea here , as I've alluded to in the past don't be cookie cutter , don't have a cut schedule of here's when I rebalance , make it really customized . So that's kind of number one . Now let's go back to the example here . If you don't have an intentional strategy , here's what I want you to do . Okay , and it's not perfect and you're gonna go .
Ari , where's the science behind this ? Okay , it's my logic from working with clients . Let's assume here that you have a portfolio 80% of it is inequities , 15% is fixed income , 5% is cash . Okay , if you don't have an intentional strategy , I want you to choose a number . Okay , this number is between 20% to 25% .
That's the number I want you to say Ari , this is the amount that's in cash . And why is that in cash ? So , if you have a million bucks , at a minimum $200,000 should be in some conservative safe asset . But here's where it gets interesting , the reason it is so arbitrary . Let's pretend that you wanna spend $50,000 a year .
Okay , you have a million bucks , you wanna spend 50,000 bucks a year , so you can do everything you wanna do . I'm gonna guess that's low , but let's just use it for example , sake . And you have , like I just said , 20% of that million in cash . Okay , so now you have to call it 200,000 bucks and just super safe cash , don't have to worry about it .
That represents four years of living expenses . 50,000 a year times four years . Okay , well , the average market downturn is about two to two and a half years . So to me , let's double it . Let's have that four years . To me , that would be actually a very safe portfolio , but a lot of people would go .
I know that's safe and that's going to allow me to do some of the tax strategy you're talking about , because if I'm living on cash , it means I'm not pulling from my IRA , which keeps my income low . Okay , I see where you're going with that , but now let's bring it back to real life , because in real life , you're probably not spending 50,000 bucks a year .
Maybe you're spending 100 , or maybe you're spending 150 . So now , if you have 20% of your million bucks , you've got a year's worth of cash on the side . But what about next year ? And how do you know ? Okay , what do I sell for my current portfolio ? So next year I have cash as well .
There's something we need to think about , which is we need to protect against the market and sometimes we need to protect against ourselves , and there's a mix of both . Let's assume there's a down market , okay , and the down market goes down 25% . Well , what if the market doesn't recover in time ?
That's a lot of you are thinking and , by the way , it might not I can't guarantee it will but I want you to think of this as a buffer . Okay , it can stave off the need from pulling from your portfolio for one , two , three , four , five years . Then it did its job . So here's an example .
For a 2010 retiree , you didn't really need to use these funds for 10 plus years . For a 2000 retiree , you spent the first 30 years of retirement using it . Then , just a few short years later , because of 2008 , it was oh my gosh . What do I do ?
None of us can predict , based on when you retire , how long we're going to need it , or if we need it , and to what extent we just need it to help soften the blow . So here's the example I'll give you .
You will find that if you don't have too much in cash or bonds , you may actually get to the point where you need a lower percentage of your portfolio in cash and bonds later in retirement . Let's practice out . Let's assume you have a million bucks . You retire at 65 , so security doesn't start until 70 .
You're taking 5% out of your portfolio , which means 50,000 bucks a year , which is the equivalent of 250,000 if you want five years of living expenses . So that tells me . What if you have a 75% equity and 25% fixed income portfolio to start ? Okay , I think that should resonate . Now you might go on . Already I've got other income sources .
There's more to this . I go , I get it , but let's keep it simple . Let's assume you get decent returns from this portfolio Over the first , let's just say , five years , and then Social Security helps out .
And when Social Security helps out because once again you're 65 today , social Security is going to help you out in five years it's going to bring in 40,000 a year . Well , now your portfolio is worth 1.2 million because you've gotten good growth and now you only need 10,000 a year from it because you want to spend 50, . 40 comes from Social Security .
Less than 1% is now needed from your portfolio , which means a stock portfolio generating 2% to 3% in dividends . You're covered . Your need for cash went from 25% of your portfolio to zero . Okay , so hopefully this just resonated . Understand that your portfolio , if you invest it appropriately , it should be a cash generating machine .
Now , everything I just said there makes a lot of assumptions , but a million dollar portfolio , some mix of stocks and bonds . It could generate easily 3% of cash from interest in dividends . And why do we do that ? We need that to pay for living expenses and everything you want to do in retirement . So why did I go through this big example ?
You're going all right , you didn't even go through taxes . Well , one , to show you that it's not cookie cutter . But two , you really , if you want to retire early and maximize your tax situation , you need some aspect to pull , excuse me , some account to pull from , like cash , meaning that might just be cash you're living on to keep income low .
Or you might need a brokerage account and in your brokerage account you might have positions with a ton of gains , some with a ton of losses , but your IRA and Roth IRA , even if you are above age 59 and a half , so you can pull from them without penalties or excess taxes . It doesn't mean I want you to , I want you to go .
What accounts and assets do I have , like a cash account or a brokerage account that you can live on because it's going to keep your income low , so you can do those Roth conversions that I talk about so often Roth conversions can conservatively add hundreds of thousands of dollars , if not millions , when done well . But that's just number one .
Okay , roth conversions , these are tremendous ways to save . Just it sounds crazy , but millions of dollars in taxes when you do it well . Now , if you don't do it well , it would have , in a lot of cases , been better off doing nothing . So it's you want to implement it really well , and the idea here is through an example .
I've told most of you a lot if you listen to the podcast , which is my cauliflower example . Let's assume that you have a $3 million portfolio . Okay , you have a $3 million portfolio , and that $3 million portfolio gets broken down in a few different ways . You have 500,000 or Roth IRA . You've got another 500 in a brokerage .
So really , you've only got 2 million in what we'll call in the RMD account . Okay , that's your IRA . Well , you're gonna be projected if you have 2 million dollars right now . You would have to . If you had your RMD today , you'd have to take a $76,000 RMD . So you're gonna already . It's not really a big problem .
Okay , so $76,000 RMD , maybe you're going already . I need a hundred thousand to live on anyway . That tells me 76,000 comes from my IR from my IRA , because I have to take it , whether I want to or not . The other 24,000 that's gonna come from somewhere else .
So security or my Roth IRA or my brokerage account , it can come from wherever you'd like , but 76,000 is coming from it . But now you're going already . This isn't that applicable . I'm listening to this right now . I'm 50 years old , I'm 55 . I'm 60 , I'm in my 40s . I'm not in RMD mode . In fact , that sounds like when I'll be .
You know , I can't even think 30 , 40 years down the line Will I still be alive then ? You'll be alive then . But some of my clients will joke me with me about that . But I want you to know that that 76,000 dollars doesn't seem like much . So why do I give you that example ? What if you invest well ? And what if you grow tremendously amount ?
You're investing really well , and now it's worth five million dollars . Well , if it's worth five million dollars , you would be projected , once it's RMD time , to have to take a RMD of a hundred ninety thousand dollars , and once it starts it doesn't stop .
So it's a hundred ninety thousand , then it's two hundred thousand plus , then it's two hundred and fifteen thousand Plus , and so on , and now you're going already , wait a second . I only need a hundred thousand dollars a year to live on . Why am I being told I have to take out two hundred and fifteen thousand ?
Well , the government is saying , hey , prospect or client , in this example , you have to take this out because , whether you want to or not , you got a deduction all of this time and now we want our cut of the pie . So now you're going wait a second . Ari , I have to take out two hundred fifteen thousand dollars .
And I have social security and I have rental income and my spouse has a pension . I'm gonna be paying , you know , fifty percent plus taxes . Is that real ? I go yep , not only is it real . That's why we want to do conversions to save you millions of dollars . The reason I can't tell you the exact amount is , of course , I don't know what you want to spend .
I don't know what this looks like for your individual situation , but for a lot of clients , we are able to save them four to four hundred thousand plus dollars through quality tax planning . That's number one . Number two and one of my favorite examples is something known as tax gain harvesting .
A lot of you have heard of tax loss harvesting , but tax gain harvesting another way to pay a very little amount in Taxes over the course of your retirement . And here's what it looks like .
Let's pretend you have Apple stock and it's in a brokerage account , not an IRA , not a Roth IRA , but a brokerage account , also known as a joint account or a taxable account . They all mean the same thing and the industry likes to make it as confusing as possible , so I'll talk to them about that .
But you have Apple stock and let's assume you bought it for ten thousand dollars and it went up to a hundred thousand dollars . Okay , traditionally , if you held this for under a year , meaning you bought this Apple stock , you held it underneath 365 days and then you sold the stock , you're going to be paying taxes if you just made more money .
So you might be paying a very high amount in taxes Maybe it's 24 percent , maybe it's 30 plus percent , plus state taxes , so you might be paying a ton on those gains , maybe 30 plus percent . So if you have a 90 thousand dollar gain , you might be paying 30 percent taxes on that , which I'm sure you don't want to do .
But if you're wondering how can I pay zero percent taxes , it came to the right place , because a lot of people will go aria have heard about tax gain harvesting . Is that what you're alluding to here ? And it is . Which means and I'm just pulling up my other sheet here it's called my important number sheet . And so what this sheet is ?
It tells me all the important deadlines , Whether it's hey , how much income can we make and still do a Roth contribution , what is the standard deduction this year , and if you're going aria , I want that important number sheet . Um , it's in my ebook , so it's in the ebook .
I think it's one of the final pages in there where you can download what I'm looking at right now . But what this is saying is if your income meaning you retire let's assume you're 60 years old you retire and now you have no income , there's going to be future income , but today there's no income .
Maybe a little bit of interest and dividends , but besides that , very little income . What this means is if your income is below 89,250 dollars your taxable income , you could sell that position . I just told you that went from $10,000 to 100,000 that $90,000 gain and you would pay 0% taxes on the gain . That's correct , assuming you've held it for over a year .
You would pay 0% taxes . And the reason for that is if , for example , you were to take that $89,250 , that's essentially the most that you're able to deduct and pay 0% taxes . So to just summarize this so you can see it clearly you buy Apple stock for $10,000 . It grows to $100,000 . You have a $90,000 gain there .
What's happening is , I'm saying , based off of your income level , what if we intentionally sold this position ? Okay , so we're intentionally realizing gains . You're saying , yep , I know there's a big gain there , I want to pay taxes on it . But wait , because my income is low and my income is so low it's underneath $89,250 , I can realize that gain .
So $90,000 gain $89,250 of that gain is taxed at 0% and the other $750 would be taxed at 15% . So it's only that first $89,250 that gets the 0% tax treatment . But wait , there's more . It sounds like an infomercial there . The standard deduction for this year is $27,700 . So really , it's the $89,250 plus the $27,700 .
That's actually what you're able to realize tax-free and pay 0% taxes . So you might be here and all this going . Oh my gosh , ari , I'm overwhelmed . I know I need a certain amount of cash , like you talked about at the beginning of today's episode . Then there's Roth conversions , then there's tax gain harvesting . How do I manage all of this ?
That's why people work with me . But primarily , here's the framework . You want to retire early and you want to save the most in taxes and just optimize your financial plan . What you're going to want to do is , if you want to retire early , you need a brokerage account .
You need some asset that's going to help you bridge the gap so that you can implement this tax strategy really effectively . If you only have an IRA , it's okay . You can still implement a lot of this , but it's not absolutely optimizing the effectiveness if everything's in an IRA .
On the flip side , if , for example , you're like yep , ari , I've got a brokerage account , I've been preparing for this , I've got other cash , I've got enough to live on and I have enough to be able to pay Roth conversion taxes .
I've got enough to do all these other things you talk about , well , you might be in a really strong position to optimize your financial plan and generate two , three , four , five , either hundreds of thousands more or millions more through quality tax planning , of course , depending on the assets that you have .
The overall framework here is have the right amount in cash for your plan . Don't take a cookie cutter . Look at it . Some of you might go . You know what , ari ? I need one year's worth of living expenses , based off of my goals . Some of you might go . I need five years worth of living expenses . Some of you might be going . I need five years worth today .
Then Social Security helps out . Now I need way less . So I tell people I hope you marry your partner forever . Don't marry your asset allocation forever . Don't marry your tax strategy forever . Make sure that your plan really is customized to what you want out of life . Number two is there is so much out there with tax strategy . Please don't get overwhelmed .
Don't get that analysis paralysis . Make sure you're doing the right things , and the right things is absolutely going . What our future RMD is going to look like . What can I do today to pay less taxes ? Do I have a really strong position like Apple that's done well and I pay 0% in taxes ?
These are some of the strategies that can save you hundreds of thousands , if not millions , and it's what I love to help people do . So I hope this episode was helpful . If you have any questions on this or want me to either do it another episode specifically on just cash or specifically on just tax gain harvesting or just conversions . I love doing it .
I want to make the most helpful content out there , keep the questions coming and for all of you that want a custom strategy , of course reach out to myself , and I'd love to help you do that . I'll see you all next week and now I certainly appreciate it , and I will see you all each week .