A (5:25)

Can I pretend to be your client?

B (5:28)

Absolutely.

A (5:29)

Okay. So, James, I was thinking about eating some cauliflower. Then I was like, that doesn't sound good. I want a candy bar instead. And if you guys know, you know. But I've been. I just, early on I heard about this Roth IRA, so I put like a, whatever, 5,000, 6,000. They keep changing the amount every single year. And for those of you, yeah, there's a reason they do that, but they keep changing the amount. But I just always maxed it out because I just want to do the right thing. Now I'm retired. I'm 65. I have a million in my Roth IRA, and I have a million in my IRA. Why don't I just take money out of my Roth IRA right now? It just grew. It's all tax free. I put. I've been maxing it out. Am I going to ever get to use this thing?

B (6:12)

Great question. And the first thing that you have to understand is the benefit of the Roth IRA is not when you put money into it. You talk about eating cauliflower. It's not a benefit when you eat it. It doesn't taste good. It's not something that you're glad you did. The benefits come when you're, there's many benefits, but let's say when you're older and you feel like I'm healthy, I feel better, I have more energy. The things that I did at a young age impacted my ability to live a better life at an old. Same thing with a Roth. You put money into a Roth ira. There is zero benefit to that today. It didn't save you a dime in taxes, but as that money grows, it grows tax free. If it grows for one year, cool, that's a little bit of growth that was tax free. If it grows for 10 years, that's a lot more growth that happened. Tax free. If it grows for 50 years. Now all of a sudden you have this enormous amount of tax free growth. And so it's one of those things, it's a gift that keeps on giving where the longer you let it grow, the more benefit you're going to have. That being said, you could just keep doing this thing until you're dead and never experience the benefit. So one of the things that you have to understand or have to start thinking about is how do we tie this into our plan? And there's a whole bunch of different ways that you can do it. But first and foremost, understanding the benefit of the Roth IRA continues to compound over time as you continue getting that growth.

A (7:30)

Okay, so I'm reading between the lines here. Sounds like the financial answer would be to keep letting that Roth grow because it'll keep growing like crazy and I'll never pay taxes. So I hear you there, but it prompts another thought, which is why don't. I'm not saying I'm the first person to ever invent this, but I might be. Why don't I put some of the investments that are not going to do well in the ira? Not saying I don't want them to do well, but maybe some of the investments that maybe are a little less volatile in the ira. And then I put the investments that are like supposed to be the best because people talk about there's small cap and value and international, all these different things, but that's where advisors tend to lose me in the Roth ira, since I'm not going to touch that forever. Is that good or bad thinking?

B (8:15)

Yeah, you're, you're right. So you have a million dollars of both accounts are. You've done a good job. You've got a million dollar Roth IRA and a million dollar traditional ira and for a number of reasons both because of how much you want to pull from these accounts to support your spending and because your overall comfort level with the stock market. We've decided that a 5050 portfolio is right for you. You want 50% in stocks and you want 50% in bonds. That's the right makeup. That's great. We are not going to put any of those bonds in your Roth ira, at least as a starting point here. And here's why you're not spending your Roth IRA today in the benefits, as I just mentioned, of the Roth IRA are in the ongoing growth. So if your $2 million portfolio is a million dollar stocks and million dollar bonds, we're going to put all those stocks, at least to start with, in the Roth IRA and we're going to put all those bonds in your traditional ira. There's a couple of reasons for this. One is if your traditional IRA is what you're drawing down today. Now, making some big assumptions here, Ari, because we've, we've already worked through your tax strategy and other meetings and so we already know what we're going to do. We already know what our withdrawal strategy is going to be. But what that's going to do is it's going to give us stability in the account that we're drawing money from, which is what we need. We don't want the account that we're drawing from to be totally fluctuating with the whims of the stock market. We can't afford to have the entirety of our withdrawal account drop by 30, 40% in a bad year. So we're going to put the stable stuff there, which is going to have an un, called an unintentional benefit of it's not going to grow quite as much. AKA won't be subject to as many required distributions when that time comes. Going to give you the stability you need. All the while, your Roth IRA is continuing to grow because it is investing much more aggressively. Now, Ari, every few years we're going to need to revisit this because just naturally speaking, your Roth IRA is going to on average, grow more. Your traditional IRA might have a balance that's declining. We'll need to revisit that allocation every couple few years. But that's the concept of asset location, of do we have the right assets in the right account to support our withdrawal strategy as well as our investment strategy as well as our tax strategy.

A (10:19)

I realize I forgot to tell you something and this is my fault. Now, I have no idea how this just happened, but the owner of Arsenal just gave me $300,000. Now maybe he thinks I know what player I should pick. And for those of you who don't know, I'm a big soccer fan. But that 300,000, I don't think that's an IRA. I don't think that's a Roth IRA. It's this brokerage account thing. Does that change this? Because now the ira. I know you said make that less risky because I'm going to pull income from it. The Roth IRA can be more risky, more aggressive is what we prefer to say. So that brokerage account, how would that fit in? Especially since these two other accounts, we just create an allocation and now I just inherited some money. Do I just go change everything?

B (11:06)

So what you're probably going to want to use that brokerage account for again, this is, and it depends, but I'm going to make some assumptions here, Ari, because we've gone through your strategy and we know what's going on is you're actually going to spend down that brokerage account. And I know you that you want to spend $60,000 per year from your investments in addition to the Social Security benef benefit that you have coming in that's going to allow you to play soccer, eat all the cauliflower you want and live a happy life. So $60,000 per year, ideally, we like to have about five years of something set aside in some type of an investment that is not subject to the whims of the market. Something that's not going to yield a whole lot, it's not going to grow by 8, 10 plus percent per year, but it's going to be there, it's going to be stable, it's going to be dependable so that if and when the market does drop, the thing that you're drawing down first isn't dropping with it. That might be CDs, that might be a money market fund, that might be municipal bonds, that might be different bond strategies. It could be a number of things. But what we're going to want to do is we might consider taking that brokerage account, making that the really conservative investment, really conservative part of your investment portfolio. Internally, we call that root reserves. What are the root reserves required to almost think it's like the moat around your portfolio, the moat around your plan to insulate you from the impact of the market. That's draw that down. What does that do? It gives you something that's stable, but also what it does is that 300,000 is post tax money. It's already been taxed as you're spending it, it's not like a traditional IRA where if you take 60,000 from your IRA, you have $60,000 of ordinary income that pushes you into a higher tax bracket. By spending on this brokerage account, it's keeping your tax bracket very low. Which means we can now strategically look at your traditional IRA and say we don't want to spend this. Although there might be the case to spend. If you want to spend more, we can talk about that next. But if you're not going to spend it, do we start to shift very strategic amounts from your traditional IRA to your Roth IRA and in doing so fill up some of the lower tax brackets today, maybe it's 10%, maybe it's 12%, maybe it's 22% federal bracket lower meaning anything that's relatively lower than where we expect you're going to be in the future. Do we fill that up today to prepay taxes essentially at a lower rate today so that now all the growth on that going forward can happen in your Roth ira, which means you got more tax free income in the future. And in doing that and in aligning your investment portfolio, I should say the investments in each component of your portfolio, you structured a withdrawal strategy as you talked about to meet your needs regardless of what's happening in the market. You have structured an investment portfolio that has the right overall investment mix with asset location happening where the right investments are held in the right account. And you factor this into your tax strategy of what are you doing to strategically minimize your lifetime tax liability by pulling the right money from the right places and converting, in this case, the assets need to be converted.

A (14:01)

Two thoughts. First thought, I would like you to be my advisor for the next 80 years. I can just tell. I get a feeling. Second thought is you financial advisors get so excited about these conversion things. And I get it. Pay less taxes over time by paying a little bit more today. So in the future, overall I pay less, which I get. But you know, my real question here, would it be safe to say, and this is me now leaving client mode, Would it be safe to say, James, that more often than not it does not make sense to just pull half from a Roth and half from a traditional. And it tends to need to be customized, which is really what I think Bargain man is asking.

B (14:41)

Yes, that is, that is the truth. It needs to be customized. It doesn't need to be. I shouldn't say that. You don't have to customize anything. Just expect to pay a lot more in taxes than you need to over the course of your retirement. If you want the right strategy, if you want to know what specifically for you is going to lead to a lower lifetime tax liability, that's not going to happen by accident. It's not going to happen with an arbitrary 50, 50 split. It's going to happen with an understanding, I should say, best guess as to where our tax rate is going to be in the future. A best guess based upon some pretty thorough projections of what will your taxable income be in the future. How does that compare, relatively speaking, to each of those tax brackets we're expecting? And what can we do today at lower tax brackets or potentially higher, depending on the situation, to offset the imbalance between what you're paying today and what you're expected to pay in the future?

A (15:34)

Yeah, makes total sense. And in all seriousness, I had a prospective client that I was speaking to. Who was that example of I maxed out my Roth ira. Now I keep seeing it grow, which is awesome. But this particular couple, they had no desire, they had no legacy goals. They didn't want to leave 2 million to a child. So here's a couple that on paper should let their Roth IRA keep growing and they should pull from their IRAs. They know that's the right answer, but it feels weird to them because they're like, hey, am I ever going to use this Roth ira? I don't have legacy goals. It's only going to go to someone that I don't even know because I don't even have thought about that. They just want to spend as much as possible. So what they don't want to do is go, we're only going to pull from the IRA. Roth IRA keeps growing. Now there's 4 million bucks in there and they're 85. And they're like, we can't really spend what we want the rest of our life. So this is why. Yeah, there's the financial answer and the real life answer.

B (16:28)

And that's a very valid point. And I would say that it's very easy to fall into the trap of always spend the IRA first and always let the Roth IRA or IRA grow. There are many cases where that's not the point. But what I will say is this is by approaching it that way, it's almost like a form of tax insurance. If I'm spending my IRA today, I know what I'm going to pay. I know the tax bill I'm going to have. I know that there's going to be less of a required distribution at an unknown tax bracket in the future. So in a way, it's, it's going back to your cauliflower example. I'm eating my call. I'm eating the cauliflower today in exchange for a healthier, more vibrant portfolio in the future. In the future. Now I can draw from the Roth IRA of, okay, I'm not required to take certain distributions from it. I'm not required to be in a certain tax bracket that maybe I don't want to be in and could have avoided if I'd done some planning. So there is this element of don't defer it forever if you don't have legacy goals. But this is why it's more important to say, I think that sometimes people, advisors included, put the cart before the horse. Of we try so hard to maximize a tax strategy because we can see on paper how many tens of thousands or hundreds of thousands or millions of dollars in total value is going to add. But then people start making lifestyle decisions based upon what's best for them, tax wise, then this is real. People stop taking vacations that are the types of vacations they want to live because they're terrified to take more out of their IRA and ruin the tax strategy that's going to lead to so much lifetime value. So what are we doing it for at this point? Why, why are we putting the cart before the horse? Why are we focused on the wrong thing here? And so there has to be this holistic view of Roth conversions are giving you more flexibility in the future, they're giving you more freedom in the future. They're giving you the ability to have more options in the future. But also, keep in mind, the future is never actually going to be here. The future is always sometime in advance. And at some time, you do start having to spin the right accounts. And there is a time for that as well.

A (18:32)

I want to reiterate that last point because I had a client that was coming to me going, hey, you're going to be upset. I'm like, why? I don't get upset that easily. They're like, no, you're going to be upset. I go, bring it on. And I had no idea what it was. And they're like, I think that I really want to take this vacation, but it's going to impact the Roth conversion strategy. So I don't know if that makes sense. And I was like, this is the reason we're doing this is so you can take those trips. So I absolutely harp on that point of don't let the tax tail wag the life dog.

B (19:04)

Yes, yes. If you're doing that, you've lost the point. You've missed the point. You're going to have a whole bunch of tax free money and a lot of regrets at the end of the day.

A (19:14)

Yeah, so I fired them as clients. No, I'm just kidding. I want everyone to always know that, yeah, the life that we're talking about here, it's, yeah, finances play a huge role here, but it's so you can really do what you want to do. So for that couple, it's, hey, let's go back to the drawing board. Like, you want to do these conversions, you want to pay less taxes, great. But first, would you rather retire earlier? Would you rather spend more? Would you rather help family? Like, what's the real goal? Which is, of course, what we do here at Root Financial. So where can people find us if they want to get this holistic approach?

B (19:47)

People can find us@rootfinancial.com and real quick. All right, this is why we, you know, we talk about our Sequoia system and anytime someone reaches out to Root, we take them through our Sequoia system. This is our upfront process to design a financial plan. And it is very intentional, the order in which we do things. Because, you know, you, if someone's like, okay, it's time to work with Financial advisor, because I got insurance questions or tax questions or I got, should I buy this home? Should I retire? If you're not asking the right questions in the right order, you're going to end up in this position that we talked about where maybe you do nothing but the right conversions and end up missing out on life because of it. And so as we walk through Sequoia System, it starts with purpose. What are we actually trying to accomplish here? Take the money off the table. What does a good life look like for you? What do you want to do to avoid regret at the end of your retirement? How do we define a successful outcome? That has to be the first pillar. If we don't start with that, then everything else is going to be, it's a house built on sand. It's just not going to stand there. So start with that. Start with purpose. That happens in our kickoff meeting. Then it's, let's design the income strategy. How much can you spend in retirement? What does that look like? When can you retire? Can you do the things that you expressed you wanted to do? And where would you be pulling from certain accounts? Then we go into investments to say, how do we then design the right investment portfolio to support that desired level of income to support that income when the market's up, when the market's down, when the market's everywhere in between. But that's based upon the income strategy, which is based upon the life vision, life goals that you have. Then we talk about taxes, then we talk about insurance to say, how do we make sure this is all protected? Then we talk about estate planning to make sure how is this all protected? But there's a very intentional order that if you ask the right questions, but in the wrong order, where you do the right things, but in the wrong order, you may end up doing things wrong. Because you have to understand what are the big rocks here and what are the things that are designed to optimize the thing that you have to start with, which is that life. Well, lift we always talk about. So rootfinancial.com is where people can find us. They can book a call there if people just want to know more about content, stuff that we're doing. We both have LinkedIn pages, we both have Instagram pages. James Canola is mine. This topic. So this airs on both of our podcasts. So I have the Ready for Retirement podcast, you have the early retirement podcast. We also have a root financial specific YouTube channel. So if you're not already following there, follow along at root Financial on YouTube. And Ari, what about, what about you? What have I missed in terms of you're everywhere. So where can people.

A (22:17)

I'm everyone there. Yeah, you can find me at Trader Joe's. No, you can find me at early retirement, Ari, that's on Instagram. And then if you're watching right now or listening, we have our root collective. So that's a community where no matter where you're at your stage of your financial journey, you can join in there. And it's one thing to hear from James and I, it's another thing to get to communicate with others about where you're at and going. Yeah, I wish I would have considered doing that conversion or I wish I would have held off and actually went to Tulum and had more fun there and get more insight. So definitely encourage you to check that out all in the description of this episode for all of those links.

B (22:55)

Awesome. Well, very good. That is all we have today. Thank you everyone for listening and we'll see you next time.

A (23:01)

See ya.

B (23:05)

The information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and are not guaranteed. Any mention of rates of return are historical. And illustrative in nature and are not a guarantee of future returns. Past performance does not guarantee future performance.

A (23:24)

Viewers are encouraged to seek advice from a qualified tax, legal or investment advisor professional to determine whether any information presented may be suitable for their specific situation.

B (23:35)

Hey everyone, it's me again. For the disclaimer, please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartners.com and click Start Here, where you can schedule to call one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss on this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.