James Knoll (3:04)
There's at least a three part framework that I would want to go through to answer that. It sounds like he's actually already gone through part of this. The first part is just can you do this? And I think he's approaching this the right way. The, you know, generally we look at can I retire? Okay, what does that come down to? It comes down to can your portfolio meet the needs that you need it to meet that go beyond what Social Security or any potential other non portfolio income sources like a pension are going to generate? So basic example, you have $500,000 in a portfolio. You need $20,000 per year from your portfolio. Cool. That's a 4% withdrawal rate. That should be sustainable if your portfolio is invested the right way for call it 30 plus years, call it good. Well what about that person that needs $20,000 per year also has a major home renovation that's going to cost them $200,000. Well you take that $200,000 out of the 500, now you're down to $300,000. Can that 300,000 still support the $20,000 per year that you need? Now all of a sudden that's over a 6.5% per year withdrawal rate. So that changes the equation dramatically. So that's the first piece of what I would look at here as people tend to look at what are their expenses and they may be neglect those big one time purchases. Is that a new vehicle, is that a home remodel, Is that sending kids to college, is that paying for a wedding, is that all these different things. So think about that first, what portion of your portfolio is needed for these one off expenses and then is the remainder enough? Such that a sustainable withdrawal rate taken from that portfolio could continue to meet your. Call it your core basic income needs along the way. So it sounds like that's already been taken care of. Gary's already gone through that. He says something. I'm trying to look for the exact quote here. He says, I'm confident my portfolio can handle the hit without any impact on my retirement goals. So I'm going to make the assumption that Gary has looked at that. The second thing is, how are you invested, by the way? The third thing is taxes to skip at it. I think Gary's looking at the tax piece, and that's the question. There needs to be a progression here to get to that piece. The first piece is, can your retirement still support that? Number two is investments. And this is actually an important one of how should your investments be allocated in order to support that? So, for example, if 100% of Gary's assets are, and I'm using an extreme example here, he's 100% invested into McDonald's stock. Every single account, all McDonald's stock. He needs $40,000. And after one year of retirement, McDonald's stock has tanked 50% because no one wants their hamburgers anymore. Well, what's he gonna be required to do? He's gonna be required to sell McDonald's stock when it's down 50% to free up that $40,000. In other words, he's gonna have to sell a good chunk of stock at a severe discount. So what do you do? Number one, you don't just own one stock, obviously, but number two, you say, what's the right mix of investments between at a high level, growth investments and stable investments. We call it root reserves internally. So what's the growth allocation? Things are going to grow for you to keep up with inflation. What's the right things of internally as we speak about it? Root reserves. Root reserves is going to include any outflows you need from your portfolio over the next, call it five years. So this would be something that Gary would say, in addition to my monthly need from my portfolio, how much do I need to pull for this $40,000 to remodel? So now I'll finally get to his actual question. Once you've determined how much needs to be stable so that you have five years worth of that, so that even in a downturn in the market, you can still meet your needs. Now it's a tax piece. Now, this is where you should have a tax strategy that essentially is helping to understand what tax bracket do we want to be in now, of course, we all want to be in the 0%. If we could just wave a wand and say, I'm in the 0% tax bracket, cool, we'd do that. But what. What do I want to be in today so that I'm minimizing or not jumping into any extreme tax brackets in the future? So what Gary should do is today he's in the 24% bracket. It sounds like if I'm reading between the lines, he'll be in probably the 22% bracket when he retires. That's not the full picture, though. What are you going to be In, Gary, say 10 years from now, 20 years from now? Who knows? Some things. But specifically, what about when Social Security starts? What's that going to do to your tax bracket? What about when required minimum distributions kick in? What's that going to do to your tax bracket? What about when certain, I don't know if there's windfalls of selling a home, moving states, other pensions coming into play. Understanding the full landscape of what will your tax bracket look like over the course of retirement so that you're not just looking, okay, I'm in the 24% bracket today. Well, so what? What are we comparing that to? What we should compare that to is where you're going to be. Which, yes, is somewhat of an educated guess because tax brackets and tax law can and will change. But when he starts to do that, he can start to say, oh, maybe, for example, I shouldn't exceed the 12% bracket. Well, the good news about retirement planning is you get to fully dictate this. I shouldn't say fully to an extent, because you can pull the right amounts from cash versus taxable accounts versus traditional IRAs versus Roth IRAs. You can manufacture the taxable income that's right for you. So if he's looking at this and if he looks at his whole tax landscape and says I should never really be above the 12% bracket, well then come up with the right mix of withdrawals. Is that more from cash and brokerage and then a little bit from the IRA just to fill up the 12% bracket versus if he says I should really be filling up the 32% bracket today to avoid being in the 35% bracket in the future, probably means he has an enormous traditional ira. So that's kind of an extreme example, but it's essentially looking at where am I going to be, where am I today, as is. And then where should I pull funds from to try to fill up the right bracket. But here's One last thing. There's a theme here. Ari, you asked me a question. I take way too long to answer it. So sorry about that. But here's what I see some people doing. They have cash on hand, and we almost get addicted to that cash on hand because it's there and it's tangible. And we're going to, you know, we're going to implement our Roth conversion strategy because we're going to be living on this cash. Well, if Gary pulls more money from his IRA today and that pushes him into the 32% tax bracket because he wanted to preserve that cash, and now next year he's living on the cash and converting only up to the 22 or 24% bracket. He kind of shot himself in the foot doing that. Said, wait, use your cash to prevent going into the 32% bracket, not to allow you to convert in the 22 to 24% bracket. So we almost have to detach ourselves from being too connected to any of our specific accounts. That cash account tends to be something that people get pretty connected to to say objectively, where should I pull funds from today to minimize the lifetime tax liability I'm expected to pay?
