Tax Planning for a Better Retirement Income Plan
With Ed Slott, CPA
On this episode of the Plan for 100 Podcast, AIG is joined by Ed Slott, CPA, an expert in helping people maximize their retirement savings to discuss how to grow a nest egg large enough to fund a retirement that could last to age 100 and beyond.
Voice Over: [00:00:08] Thanks to medical advances and healthier choices, Americans are living longer, more active lives well into their 80s, 90s and beyond. Welcome to "Plan for 100," a new podcast from AIG. This podcast series is devoted to educating and empowering Americans to prepare for longer lives and retirements that could last four decades or more. Our podcast aims to help you "plan for 100," no matter what age you are today.
Mike Treske: [00:00:39] Hello, I'm Mike Treske, executive vice president and chief distribution officer for AIG annuities and mutual funds. I'll be your host today for episode two of AIG's new podcast, "Plan for 100." I'm excited to be joined today by nationally recognized retirement expert Ed Slott CPA. Ed is often quoted in The New York Times, Forbes, Money, USA Today, Investment News, and a host of other national magazines and financial publications. In fact, he was named the best source for IRA advice by the Wall Street Journal. Ed has created and starred in several national public television specials, including his most recent, "Retire Safe and Secure with Ed Slott." He's also authored many financial and retirement focused books and publishes Ed Slott's IRA Adviser, a monthly IRA newsletter. Ed, welcome to "Plan for 100."
Ed Slott: [00:01:37] Well, it's great to be here. Thanks, Mike.
Mike Treske: [00:01:39] You're welcome. Ed, you are an expert in helping people maximize their retirement savings. What advice would you give to people who may need to grow a nest egg large enough to fund a retirement that could last to age 100 or even beyond?
Ed Slott: [00:01:53] Well, it's not that unusual, in fact, just a couple of days ago, I saw this piece in The New York Times about a 92 year old woman in Australia. They call it Australia's fastest 92 year old woman. She wins the three K, the five k, she does 10,000 steps a day, and according to her fitness watch, ran, did three million steps in 2018. So you have a lot of active people out there, so it's pretty likely people are going to live to 100, and who knows how far after that? So you really have to plan for a long time, which means saving as much as you can along the way, and watching out for the tax planning. The tax planning is the secret item that people usually overlook. Remember, when people get into their, contribute to their IRAs, and their 401Ks, those are tax deferred accounts. Everybody knows what they are, but I don't think most people realize, that when the money comes out, that's when the taxes are paid. That's what tax deferred is. Now, those taxes have to be managed, and the lower you can make that tax bill in retirement, obviously the longer the money will last. Obviously, if you pay the government less, you'll have more and it'll last longer. So the plan is to create a plan by constantly contributing as much as you can, and it doesn't matter what age you start at. Some people in their 50s say, well, it's too late for me, I've been raising my kids with the family and college and everything, well start now. You may need that money for 40 or 50 more years. Whenever you can start, you should start, and there are extra benefits in the tax code, actually, for older people people, 50 or over, to make so-called catch up contributions, where they can contribute more. Maybe there's more money available now that the kids are out of the house, so you have to have a solid plan to keep contributing and do the tax planning.
Mike Treske: [00:03:52] So how does specifically the tax planning enter into the retirement process, particularly upon the beginning of the income from your asset?
Ed Slott: [00:04:01] Right. Well, again, if you have an IRA or 401K, you know that's tax deferred money. And one of the plans might be to eliminate that tax over time. For example, maybe by converting to a Roth IRA. Now that costs money upfront. So it's kind of counterintuitive. How do you save taxes by paying taxes? How can you save taxes by paying taxes? By paying upfront now, maybe at lower rates. you have to look at the history of tax rates. Over time, they may go way back up. They're very low now, but if you look at the history of tax rates, and if you look at our debt and our deficit, there's a good shot rates can shoot way up. So it might pay to convert part or all of your IRAs to Roth IRAs. That's one strategy. Another strategy some people may not realize is a tax strategy but is permanent life insurance, a whole life policy. Now, just for the record, I don't sell life insurance, I don't sell stocks, bonds, funds, insurance, annuities, none of that, but the tax benefit for life insurance, that tax exemption is one of the biggest benefits in the tax code. It might pay to work with an adviser and look at using that as a retirement vehicle, to put money away into a life insurance policy. It provides many benefits, the biggest of which is that, obviously besides the death benefit, if there's a death it pays off tax free. But the big benefit is that the growth in there is tax free, the leverage is tax free, and the payoff is tax free. So those are two, two ways to turn taxable money to tax free. I always like to say on my programs the way to have more is to move your money from accounts that are forever taxed to accounts that are never taxed. That's the key to having more money in retirement. If you give less to the IRS, obviously you'll have more, but it has to be planned, and the planning can start at any age.
Mike Treske: [00:06:11] Ed, given the fact that we understand it's important to, obviously, start saving as soon as you can, being aware of taxes and various strategies that can be out there that can help alleviate or transfer taxable to tax free, as you just discussed, that's one to one aspect of it, but what about something that not only would provide tax relief type of income, but also income that you can never outlive.
Ed Slott: [00:06:39] Yeah. That's an important part too. At some point, and as you get older, income becomes more important than savings, because savings can run out. Not only do you have tax risk, but you have stock market risk. Those are the two biggest risks. Actually, those two risks, there are three big risks to your money and making it last as long as you do, especially if you're going to last to 100 or more. And the three risks are the tax risk, the tax risk, which I've mentioned, the stock market risk. But if you lose money to both of those, you have a third risk, which is longevity risk, because if you're losing money in both of those areas, the stock market and taxes, you you won't have enough and it won't last as long. So what I tell many people is to look at putting some money into guaranteed income sources like annuities. Now again, I don't sell annuities, but they provide guarantees. At some point, you need guarantees. That's why I say guaranteed income is more important than savings, because savings can run out in a few ways by being taxed, being lost in the market. Remember, if you're older and the market tanks, or it goes down, and you lose money, you don't have the time in years to wait for a correction, and you get subject to having to take withdrawals in a declining market, and you can never recover from that. It's a cycle. They call it a sequence of returns risk, but all it means is, you'll run out of money. So it's imperative to have some money. And again, I don't sell the annuities, but I think everybody should have guaranteed income for life, at a minimum for their basic living expenses, at a minimum. So you never have to worry about money for the bills that have to get paid. Once that is covered, then maybe the rest you can be more aggressive in your investing, maybe more in the market, and things like that, but you've got to have guarantees. It's so important, because you don't know how long you're going to live.
Mike Treske: [00:08:49] Ed, thank you so much for your thoughts and your perspectives, and for joining us today on the "Plan for 100" podcast. We really appreciate your time. We hope you'll come back and join us again.
Ed Slott: [00:08:59] Sure, Mike, thanks.
Voice Over: [00:09:02] Thank you for joining us for AIG's "Plan for 100" podcast. This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your situation, consult your professional attorney, tax adviser or accountant. Guarantees are backed by the claims-paying ability of the issuing company. For more information, please visit our website, planfor100.com.