In the first of our two-part series on tax free retirement, we describe the problem . Next week, in part 2, we'll cover the solution.
According to a 2000 survey (and these percentages are still true today):
Obviously we all want to be in that 4%. A major factor in this can be retirement planning, especially tax planning.
Former comptroller of the United States, David Walker said a decade ago on our current fiscal path, the United States could be heading toward bankruptcy, unless future tax rates doubled. By 2020, 88% of US Revenue went to Social Security, Medicare, Medicaid, and interest on our debt. At the same time, Americans had over $25 TRILLION in retirement assets. So it stands to reason that taxes on that money will go up.
Next week, we'll discuss further how to solve this problem.
If you need help putting together a financial plan - feel free to reach out to Michael and Stacey. You can find them on our website - artofwealthunbroken.com. Or give them a call at 855-378-1806.
Jag: Welcome back in to The Art of Wealth Unbroken. I am Jon "JAG" Gay. Today's the first of a two-part series with Stacy Andres on tax free retirement. Welcome Stacey. Good to be with you.
Stacey: Thank you, Jag. Good to be here.
Jag: So today we're talking about the problems facing retirees to try to have that tax-free retirement.In our next episode we'll work on the solution, but before we can get to a solution, we've got to identify the problem, right?
Stacey: Absolutely. That's where everything's starts.
Jag: So, where do we start? Stacey?
Stacey: When I came into this industry back in 2013, I got connected with an organization that had a very, very good story, and I won't mention their name, but when it came to actually planning and strategizing, they really only used two products.
They used one insurance product and they use one variable annuity product. And I was looking at that and I'm going, there is no way that you can say that for every single situation that these two products are just the right solution for every single situation. And so I learned a lot from them because like I said, they told a very, very good story, but when it came down to implementation, They were definitely not doing what was in the best interest of the client.
In my education, I was going to conferences and I was taking classes and looking at different solutions. I came across this study that's pretty old right now, but it's from 2000. For every 100 people. 16 of those 100 would never reach age 65. Okay. 66% of those 100. Would have an income that was at, or below $20,000 a year.
Jag: Wow. That's scary. And we see that,so many times. You see so many of these awful stories of senior citizens, having to scrape by, on social security and not much else. And they're really having a hard time making ends meet. So that's not surprising actually, Stacey.
Stacey: Unfortunately it's not, but it is at the same time, because you would think when we live in the wealthiest country, in the world, that we should be able to do better. As we continue to go through those statistics of those that have that income below $20,000 a year, they're going to be dependent on their children. They're going to be dependent on the government. Many of them are going to be forced to work beyond when they want to, just because they want to have some sort of lifestyle that they don't want to give up.
14 of those 100 would have incomes in excess of $30,000. Not a huge difference, but it does give a little bit more freedom to be independent, but still, maybe not necessarily the picture that we have in our minds as we're growing up. When we said, okay, we're going to work our life. When we retire, this is what we want our retirement to look like.
So they're still giving up a lot. But better than less than $20,000 a year.
Only four of those 100 would have incomes of over $50,000 a year. Making them what this study determined would be financially independent.
Jag: Wow. That is one out of every 25 people. 4%. That is surprising.
Stacey: It is now we're 21 years post this study, maybe the incomes have increased a little bit since then, but the numbers haven't. The categories of the people fall into are still identical.
And the money, obviously the income has to go up in order to offset inflation, but regardless it's scary. I guess the question is that people need to answer which one of these categories do they want to fall into?
Jag: I think that's a pretty easy question. Stacey. Might be the easiest question you've ever asked on the podcast. I want to be in that 4%.
Stacey: I do too. I do as well. I think everybody does. When I look back and say, okay, where, what was all the education that I went through? What was I studying? I read a lot of different books. The first book that I read, from a gentleman by the name of Patrick Kelly was called Tax Free Retirement.
And it introduced me to a concept that I had never, ever heard of before. Never considered, never thought that it was possible. And then over the course of the next couple of years, several books that I read, one was called The Power of Zero by David McKnight. And the other book was called SMART retirement by Matt Zagula.
And all of these books really talked about the concept of what's going to happen with future taxes. And putting a plan in place and strategizing so that you can be in the lowest tax bracket possible when you reach retirement and possibly, if you plan correctly, never have to pay taxes in retirement, because the strategy that you put in place is such that you have no real taxable income.
So the book SMART Retirement is actually the title. It's actually an acronym for a Strategic Movement Around Retirement Taxation. Okay. What these books did, it was introduced me to a concept that allows the money that you have saved to last longer. And, I heard this a number of years ago. For a family that can prevent their social security from being taxed.
Their money will last on average seven years longer than if their social security is being taxed during retirement.
Jag: I believe that. Okay.
Stacey: There's a lot of good reasons why a person may want to sit down and have these conversations and potentially look at implementing some of the strategies to pay as little tax as possible in retirement.
Now, social security in and of itself, if that is all that you have for income, social security is not taxed, but as you start having more and more income, then ultimately up to 85% of your social security could be taxed. If that's the case, if you have a certain lifestyle that you're trying to maintain that kind of aligns with what you had during your working years.
You're just putting more of a burden on the IRA or your other accounts and your withdrawal rate to provide you the income that you need. So how those assets that you're saving for retirement are allocated in the different accounts is very, very important, right? So on last week's podcast, one of the things that was said, I'm not sure who said this, is that most people will spend more time planning one family vacation, on a vacation that's only gonna last one or two weeks, than they will spend in planning for retirement that is going to last 20, 30, 40 years, maybe even longer, and need an income to support that lifestyle.
Jag: As the kids say, Stacey, I feel seen. We talked about this last week on our podcast that, my wife and I do a lot of vacation planning. So that's a, that statistic is certainly not lost on me.
Stacey: Absolutely. So during the first couple of years, I was introduced to a gentleman by the name of David M. Walker. David was the comptroller general of the United States from 1998, through 2008. And he served about 11 years in this position under both Clinton and Bush.
Basically, he was the CPA of the United States of America, and he retired from that post in 2008. And he went on a mission to really highlight the spending problem that exists within the U S. And in 2011, he was actually on a radio show and he made a statement that if true, I believe has devastating consequences for where we are heading as a country.
And why more importantly than ever before, we need to have conversations about how are taxes going to affect us in retirement? What he said was, based on the current fiscal path, future tax rates will have to double for every income group or our country could go bankrupt. He went on to say that it really comes down to a simple four letter word and the conversation was kind of fun to listen to because people were calling in.
All kinds of guesses and couldn't figure it out. And ultimately he said, it boils down to one word and it's called math. And so we could dig into the details of this and we could probably spend one or two episodes just on all the meat and potatoes of just what that looks like, but we're going to hit it from just a really high level.
And we look at statistics. Back in 2012, 76% of the revenue generated by the us government went to four things. It went to social security, Medicare, Medicaid, and servicing the interest on the debt. . And it was projected that by 2020, 92% of all revenue generated would be spent on just these four items alone.
Jag: Okay. So how did that shake out? Where a couple of years past 2020 at this point?
Stacey: Yeah, absolutely. So let's look at 2020 and what that really looked like. So in 2020, From all sources, the government brought in 3.42 trillion dollars. In 2020 on social security, they spent $1.1 trillion. Okay. Now let's just put that in perspective.
We may have mentioned this before, but a trillion dollars is a hard number for people to wrap their mind around. If you had the opportunity to start spending $1 every second of every day. For the rest of your life, how long do you think it would take to spend $1 trillion?
Jag: I don't think I'd live long enough.
Stacey: You wouldn't because you're not going to live to 32,000 years old. That's how long will it take to spend a trillion dollars. Okay. So a lot, a lot of money. Medicare in 2020 was $776 billion. Medicaid spending reached $617.2 billion. And just the interest to service the debt was $497 billion.
Jag: All right, Stacey, I don't have a calculator in front of me. That prediction was those four items. Be 92% of all revenue spent on it. Where did we come out?
Stacey: That totals up to $2.99 trillion. And that equaled 88% of revenue. Okay. So a little off, but not by a lot. Yeah. Not by a lot. And that was before COVID head. Right? So you look and say, well, Trillions of dollars trillions. Nine trillion one year.
Like I think I heard that the number was something like $22 trillion has been created out of thin air due to what, what happened with COVID. So that 88% doesn't include paying government employees. It doesn't include spending on infrastructure. It doesn't include the one thing that the government is responsible for and that's defense of our country.
Jag: I was wondering where that would fit into the equation. Wow. Okay.
Stacey: Yeah, absolutely. So you wonder why we're approaching $30 trillion in debt as a country and is it even possible to ever think about really servicing that debt or repaying that debt? As of 2020 in taxable accounts, there was $6.9 trillion in 401k plans.
403BS, 457's, employer sponsored tax deferred retirement accounts. In taxable IRA accounts. There was $19.3 trillion. So we're looking at $27 trillion as a phenomenal amount of money. A huge resource that if the government is ever going to go after something, probably taxable accounts that we need to start drawing out of at a certain age, they start requiring us to take distribution
that in many cases force our social security to be taxed, which then starts to exponentially create bigger problems. So it's an easy target for the government to go after for an additional income source. And those that are going to be most impacted are those that are needing those monies to live on.
Like we said earlier for that 10, 20, 30, 40 years, right? When it comes to what is the solution to being able to have a retirement that we know our money's never going to run out because the biggest fear that people have is that they're going to live longer than their money is going to last.
Planning for taxes in retirement and starting early to do that if you are, if you're 65 now, unless you have millions of dollars saved, which that is not the average American. Most people that I work with have somewhere between $300,000 and $500,000, they don't have the flexibility of being able to have high taxation or significant drops in their accounts due to what's going on in the market.
They've got a limited amount of funds available and so planning for minimal taxes or a tax-free retirement, it needs to start early. Because the earlier you start, it really comes down to the whole idea of even compounding interest. My son started at 16 years old, putting some money away and I am blown away by how much he is going to have when he reaches 65.
Just for that little bit that he is tucking away every single month, because he started early. And so this is a very similar idea. You don't need to start at 16 for this. For him, we did. But the earlier that you start, the process of planning is going to be so much more advantageous down the road because the strategies are just gonna be able to work that much better.
Jag: So Stacey, if I could sum up our oodcast today, only 4% of Americans for this 2000 study are making a decent living in retirement. And based on what's going on, statistically with the governmen, taxes are not guaranteed, but very, very likely to go up and potentially the government could come for some of the. traditional retirement vehicles that we have and taxes could go up on that. So it is absolutely important to plan. Plan as early as possible. And we're going to talk about some solutions in our next episode.
Stacey: That's what we're going to do. And I'm looking forward to that.
Jag: Stacey, our listeners should follow our podcast in Apple podcasts, Spotify, or wherever they're listening right now to hear about those solutions coming next week.
In the meantime, if you want to talk to Stacey, learn more about your financial future. You can visit our website, ArtOfWealthUnbroken.com. That's artofwealthubnbroken.com. Or if you want to pick up the phone, what's the phone number stacey?
Stacey: The phone number is (888) 302-5559.
Jag: Great stuff, Stacey, look forward to talking next week.
Stacey: Great. Thank you.