Advised Podcast Ep 011: How To Spend In Retirement | with Hamilton Brandenburg

Today's episode is all about retirement income planning. I chop it up with Hamilton Brandenburg, a virtual financial planner focusing on helping retirees spend money and save on taxes. If you're doing your own napkin math and considering retirement, this episode will give you a lot to start thinking about.

Check out more from Hamilton:

Key Takeaways:

  • Retirement income planning requires a flexible approach to spending, taking into account the specific needs and desires of each individual.
  • The 4% rule is often misunderstood and may not be suitable for all retirees.
  • Cash flow planning is essential to determine the affordability of retirement.
  • Financial advisors play a crucial role in empowering clients to overcome money mindset and fear of spending.
  • Preparing for market volatility and crisis situations is essential for retirees
  • Retirement planning requires flexibility and ongoing updates to adapt to changing circumstances.
  • Tax planning is crucial in retirement to reduce lifetime tax bills and optimize financial outcomes.

Listen above or read the transcript below, and let us know what you think of the episode!

Rick Luchini (00:00):

They do the quick mental math of the four or 5% and then they compare that to their salary and they're like, oh shit, there's no way this is happening. And then when we actually show 'em how it works, they get a lot closer, a lot faster.

Intro (00:15):

You are listening to Advised with Rick Luchini.

Rick Luchini (00:18):

So we're back with our second virtual podcast in our new framework and we've got my new best friend from LinkedIn, Hamilton Brandenburg, the Nomad financial advisor. Hamilton, why don't you just tell us who you are, what you do, and then we'll get into the meat of it.

Hamilton Brandenburg (00:41):

Alright, that's awesome. Yeah, the Nomad Financial Advisor, I like that I might have to rebrand my company. Right now we're just a boring Brandenburg Financial Services, but we are a small independent financial planning firm that focuses on people who are right at that stage of transition of going from the kids have left, mom and dad are still around, but now we're making that big leap into retirement and we're facing all these big questions around how to start drawing down our spending, all that kind of fun stuff. So we're really a retirement distribution focused firm and we worked virtually obviously mentioned me being a nomad. I've been traveling full-time in my RV for about 18 months now with my wife and four kids. And we have clients all over the us, mostly on the east coast, but up in Ohio. We have clients, a lot of clients down in Florida. And so the virtual thing really works for the folks who we're working with and it's created a really fun career

Rick Luchini (01:42):

And that's awesome. And God bless you with four kids, I have three and it's difficult in a 4,000 square foot house. I don't know about what you guys are doing, but it's awesome. It's inspirational and it does show that you can do things like that in the world that we live in now and run a high end financial planning practice the way you do completely virtually, whether that is from your basement, whether that's in a fifth wheel, traveling the country with your family like you guys do, or whether it's snowbirding and working a few months in Florida and coming back. You can do things like that just not in our industry, but a lot of them, I think you just have to get creative and you have to have the guts to do it. So

Hamilton Brandenburg (02:36):

Yeah, I was saying it's pretty impressive to me when I started doing this. We all have these kind of limiting beliefs or head trash about, oh my God, are people going to think that? Is anyone going to want to work with me if they know I travel full time? Is that going to be too lavish? Like, oh, my advisor leaves and he's gone all the time. Or if you're focused on retirees, are they going to actually be comfortable working over Zoom? And my first few months working virtually, I onboarded an 82-year-old client over Zoom. I was in upstate New York and she was in Florida and she was like, that's fine with me. I zoom with my therapist. So I think we sometimes sell ourselves short. I'm like the Okta oxygen S and their ability and desire to use technology when it matters. They're a lot of the times very capable and competent of it and yeah, they love it.

Rick Luchini (03:25):

Yeah, I agree. And it gives you a lot of flexibility in what you can do, who you work with, and it gives the client a lot of flexibility because now they can go find somebody that fits their needs and their personality rather than trying to be forced to stay within a 40 mile radius of where they live because the right person or the right firm might not actually be in that radius

Hamilton Brandenburg (03:53):

A hundred percent. Yeah, it really allows you to focus on a specific solution to a specific problem rather than just who showed up at the Chamber of Commerce this week or who stopped into my office when they were going to pick up some more milk at the grocery store kind of thing.

Rick Luchini (04:08):

Right. No, yeah, I agree. So you mentioned that you're working with that transition age right before and right into retirement, and that's really where I want to focus today because I do a lot of that work myself. And first off, go into what that process looks like on a high level. When you do onboard somebody, what are the things that they care about and what are the things that you are looking for to start establishing rather than the traditional just here's a bucket of money, here's an automatic distribution, set it and forget it. Hope you don't call.

Hamilton Brandenburg (04:50):

Yeah, no, for sure. Yeah, it's interesting. A lot of the folks who we onboard, and you probably have had this experience too, when you are focusing on retirement distribution planning, you get a lot of people who've never worked with a financial advisor before. You get a lot of people who, so for me, most of our clients come from either Lockheed Martin that was in Atlanta, so it's referrals from other Lockheed clients. So they've spent their whole time, their whole life, 30 years just putting into the 401k, they'd get a great pension stock option account. Or we have a subset of clients that are all middle management for Costco corporate. So again, it's people who spent 30 years at the same company putting in their 401k, and they've usually never worked with a financial advisor before. So a lot of times when they're coming to us, it's really as simple as I blinked my kids were gone, my career got me to here, I've managed to save a million or 2 million or 3 million in my 401k and my basic benefits or my stock option account. And now I kind have this idea of what retirement looks like, but I just want to know that does it work actually, does the math work out? So a lot of times they're just coming to me initially to see what can I spend, what kind of a life am I going to have and

Rick Luchini (06:12):

Can I realistically, can I afford to do it?

Hamilton Brandenburg (06:15):

Yeah. Can I afford to do it a hundred percent? So it does take a few meetings usually because what I've found, and I'm sure you can attest to this is that the answer to that might be very simple, but the process to come up with that answer takes a lot of legwork on you and I and it's a lot more than just looking through investment statements.

Rick Luchini (06:34):

Let's get into that a little bit. How do you approach spending in retirement and try to find that balance between actually spending your money but also not running out?

Hamilton Brandenburg (06:50):

That's a really great question, and what I'll say too is the place that I start in answering this question is looking at how do retirees actually want to spend their money in retirement? And there've been some really great studies over the years that are in many ways counterintuitive. You start talking to somebody and if you ask them, tell me how you think you're going to spend money in retirement. Normally, in my experience now I could be wrong and every person's different, but people have this perception that in the beginning of their retirement, they're going to spend a little and they're going to need so much money to spend late in retirement. They're going to have so much unplanned for health events and chronic illnesses and nursing homes. And what we have found is that a lot of times the inverse is true. A lot of times what ends up happening is that when people are in their sixties and they're healthy and they just quit their job, they're so excited, enthusi, they want to go enthusiastic.

Yeah, they want to spend, they take the grandkids to Disney, not once, but every year they want to do a big national park trip in their rv. So people want to spend heavy early in retirement. And the problem that a lot of my clients have, especially the ones who are working with financial advisors, and you tell me if you run into this Rick, is that they've been told, well, you have to follow the 4% rule. You have to only take out 4% of your investments. And I don't know about you, but I think what's hilarious, especially if you get on Facebook, the Facebook retirement groups, so much misinformation, especially people don't even know what the 4% rule really is. So they think, what does that mean? Every year I'm taking out 4%. But they take a very static and fixed approach to spending, which a lot of times results in not being able to meet their goals for what they want to spend early in retirement and having a situation where when they do conclude their retirement, they had this huge mattress full of cash that they could have used for a lot more memories. It's definitely a balancing act.

Rick Luchini (08:51):

End up being the richest person in the cemetery, which I can promise you, you do not get a prize for.

Hamilton Brandenburg (08:59):

So we take a flexible approach to spending with our clients where we use decision rules and we'll say, Hey, we're going to coordinate your investments with things, other income sources like your pension, your social security will take a more flexible approach. And over time as your investments grow, your income will grow as well. But if you get into a situation where as does happen, where the stocks will short time lose their value, you've got to plan in place for how you would need to adjust your income and how much to make sure that you're still able to meet your spending goals. So I think taking a real world approach where you're making flexible adjustments, that makes a lot of sense for our clients, and it provides usually a much higher cash flow for them.

Rick Luchini (09:45):

Yeah, well, right, that's my point. I do the same thing and what ends up happening, the knock on that for the folks that don't is they'll say, well, but good luck getting the client to spend less after you've, let's not treat these people like little kids. Exactly.

The event that causes them to spend less in the future may never happen and when and if it does, they're spending less than a bigger number than they would've had to begin with. It's no different than your investment going from a hundred thousand to one 50 and then down to one 40. My perception is that you gained 40, their perception is that you lost $10,000, right? So if you're cutting back a little bit on a bigger withdrawal that you wouldn't have had in the first place, you can handle that. That doesn't mean start eating ramen noodle. That means maybe take two vacations this year instead of three and then bump it back up the year after because the market comes back.

Hamilton Brandenburg (10:55):

For sure. And I would say too, and maybe it's worth pointing out the difference in the approach. I mean, how do you explain the 4% rule? If you have a client come in and be like, oh, do you have people come in that they've heard of that before? Or is it just me that they'll bring that

Rick Luchini (11:11):

Up? Well, they don't know what it is, but I think that what they're doing is off the top of their head saying, okay, my portfolio is this much. They usually just rattle off four or 5% of that and assume that that's a static number indefinitely throughout retirement. And that can be fearful for people too, because when you do that and you don't ever increase it, and you also know that inflation's going to catch up with that number, it scares them.

Hamilton Brandenburg (11:40):

Yes. A lot of times we don't have clients bring it up often, but sometimes they've heard like, oh, the 4% is a safe withdrawal rate. And a lot of times there's a lot of misunderstanding over what that rule really is. And so for the nerdier, I like to go back to, let's go back to what the 4% rule came from. It was a study that showed that if you invest a very certain way with half of your money in really safe investments and half of it in growth investments, you can retire at 60, you take out 4% and that's your base. And every year you adjust that up for inflation based on what the consumer price index does. Now, I've lost our one listener by saying all that, but my problems with that kind of a traditional approach is number one, best case scenario. Like you said, you die with way too much money and you could have spent more. Number two is just because consumer price index or inflation has gone up doesn't mean my investments have gone up. It doesn't mean that my investments can afford to take a pay raise, it's just me taking more money. We take a very, and also

Rick Luchini (12:44):

Who's making me have 50% of my portfolio in treasuries? Not me. I'm not the one doing it.

Hamilton Brandenburg (12:52):

No, a hundred percent. And a lot of times people following that 4% rule, they're not investing that way. They're may be a hundred percent in stocks or 10% in stocks. So there's a lot of pick and choose that happenings, and that's another reason why we don't use that approach. We take an approach where we're flexible. We usually will take out a higher amount initially for their initial withdrawals, but we just talk to the clients like, Hey, we need to make a deal with ourself that we're not going to take a pay raise until our investments have earned a pay raise. And if we're taking a higher amount now, we just need to have a deal that if we are in a situation where our investments have lost a lot of money, and I'm talking like a third of your nest egg, we might need to cut back by five or 6% a month on our income, but history would show you that that kind of approach works really well for a retiree who's retiring in the seventies, right? In the time of high inflation, high taxes, a flat stock market that doesn't move for four years. If it works, then I feel really confident and today going forward that people can afford to be more flexible with their cashflow.

Rick Luchini (14:01):

Yeah, no, I agree. And just to throw it out, the term for that approach that we both use is guardrails. So if you're listening to this and that sounds interesting to you, that's the thing you Google or that's the thing you ask about is a guardrails approach. And there's a lot more that goes into it with cashflow planning and everything else to actually find out is that number going to work? Because you said the first thing they want to know is, can I even afford to do this? Well, the way to find that out is to do cashflow planning.

Hamilton Brandenburg (14:42):

How do you handle cashflow planning? If you have somebody who's getting ready to retire and they've got a million dollar 401k and they're coming to you saying, and you're saying, Hey, I think you could pull out 50 grand or 40 grand or 60

Rick Luchini (14:54):

Grand a year, I don't care about how much they have first, because what we're going to do is find out, obviously again, within reason of assumptions, what they're going to spend and then work backwards and say, yes, you can afford it. No, you can't. Or we're right in that middle ground where you have to decide how much risk you want to assume or which one of these things you want to cross off the list in 11 years if we have to do a cutback. But the first thing is what are you spending now really not like a question, but actually an itemized list of what you're spending, which one of those things are going to dramatically increase or decrease? So yes, the mortgage will be paid off, whatever, literally build it all out

And then spend some time daydream and saying, you're not doing it now, but when you retire, what are those things you're going to do? Are you going to take the grandkids to Disney? I'm in Pennsylvania, I have a lot of clients that snowbird to Florida and the ones that don't, I model it out because as soon as they retire, they change their mind and they're going to, right? So what's that going to cost? Inflate it? Are you going to do it till you're 90 or are you going to do it till you're 86? Put all that stuff in and yes, every single year after that, replace an assumption with a fact and that gets us closer to the truth. But you've got to start somewhere. So the first thing I want to do is figure out what they're actually going to spend in a perfect scenario to be happy. Then work backwards and do the math to say, yes, you can afford it. No, you can't. Now where are the decisions? No, you can't, but you still want to retire. Okay, let's start crossing stuff off the list that we're not willing to do or yes, you can, but it's close enough that a couple of these things might have to take a step back, like you said, if we hit that bottom guardrail for a year or two in the future.

Hamilton Brandenburg (17:01):

For sure. For sure. And I think too, people, I don't know about you, but I feel like I meet two different people over and over again in that first year of retirement. The first client I meet is the one who when 40 or 50 hours freeze up on their schedule, they spend 40 or 50 hours worth of Amazon purchases and traveling and eating out, and I don't judge them for that. I love that. I'm like, you know what? Spend your money, go out, have fun, do the things that are rewarding and satisfying. So a lot of times we'll see people making a hundred, 120,000 a year who've got a couple million saved over a long career, and their spending in retirement is on par or higher than what their income was while they were working. And so you've got those folks and then you have the other kind who retires with $3 million and they sit at home asking you, Hey, can I afford to spend $5,000 to have my kitchen redone? And you're almost begging them, if you don't start taking out some money out of this account, I don't know that I can justify this relationship that was spend your money.

Rick Luchini (18:08):

Both of those go to Money Mindset and it's learned behavior, some of it from past experiences that went either good or bad, some of it from their parents, whether it was based on reality or a bad decision. All of that comes and can all be changed over time, but not overnight with continued education and showing you, yes you can, not just saying it on a phone call, but literally showing you on the screen, yes you can. Here's proof. This is what these numbers mean and an outside, here's some outlier scenarios that could happen that change that just so we're all clear. And that doesn't happen overnight when you've been a saver for 30 or 40 years and now all of a sudden you go to spend it and you actually see the amounts go down, if you don't know what that means and how it translates to the rest of your life, you're fearful. And so you just don't spend it. That's why all these people are dying with a ton of money because it's not, they didn't want to do things, it's because they were fearful to do things and nobody empowered them to spend it the right way.

Hamilton Brandenburg (19:30):

There wasn't anybody who felt comfortable and qualified to give them permission to live their lives the way they wanted to. That's right. And to say, you know what? Take that trip. Spend that money. I think there's a lot of misinformation out there, and there are also a lot of financial advisors who are more than happy to take that $2 million account, throw it in a model at 1%, charge the fee, and if the client doesn't want to take out any money, they're like, oh, well I'm still managing your money for

Rick Luchini (19:53):

You percent. 1% of 4 million is a lot more than 1% at 2 million, so let's let her grow.

Hamilton Brandenburg (19:59):

Yeah, exactly. And I think to me, this is just a huge missed opportunity of our real job is just to help people get clear about what they want out of life and help make sure that they get what they want out of life. That's really all it comes down to. Everything else you and I do a client can do for themselves if they spend enough time research. That's right. It's really about they want to delegate. They want somebody to monitor and manage their investments for them. They want someone staying on top of tax law changes so that they don't have to, and that way they're able to start spending and live their life. But taking that big transition and getting the confidence to go from putting money in with every paycheck to taking money out for my paycheck, it's a big mental hurdle.

Rick Luchini (20:39):

And I can tell you too, some of the things that I see, I can tell when something hits with somebody because surprised and I think you and I almost are numb to it because we're doing it all the time and we're studying it and we're seeing it and some of the simple things that shouldn't be taken for granted make a big impact. Something like you talked about brought up cashflow planning when you're planning your cashflow anytime, but especially in retirement because you're going to take withdrawals, don't put your vacations and your snowbirds and your all that stuff in your monthly cashflow. That's not cashflow because guess what, when you take your vacation in June, but you were trying to cashflow it to yourself, you only got 50% of that money. Yeah, yeah, for sure. So now you're taking from, so that's a withdrawal, that's a one-time withdrawal versus your monthly cashflow. It seems simple, it seems silly, but those are the kind of things that really mess people up in their first couple of years of retirement because they're not used to it.

Hamilton Brandenburg (21:59):

Yes, exactly. When you retire, this is kind of a cheesy analogy, and I'll keep making it because it makes sense in my head, but it's like when you retire, it's almost like when you think about your investments and your spending, it's almost like you're getting on a rollercoaster, but you don't know at what point you're entering it, right? You don't know if you're getting on, you know that it's going to work out long term. You know that if you stay buckled up and you keep on the track, you're going to be fine, but you might be entering the rollercoaster at the top of the loop, de loop upside down, or you might be entering it at the beginning of the ride. And so you have to have realistic expectations and you have to make sure that you've got a good plan in place for your cash flow and you have a plan in place for what are you going to do if the first 12 months of your retirement is the first bad market since 2020 or since 2008, eight, how are you going to handle that?

Because lemme say this right now, all these risk tolerance questionnaires that ask you, how would you feel Mr. Klein, if you lost 25% of your money? There is no questionnaire that can actually prepare you for how you're actually going to feel when you decided to quit your job right before the stock market went in the tank and you're seeing your IRA go from a million to 900 to 800 to 700, and you're still spending, you have to have a plan in place that says, how much is too much? What do I do? When do I do it? And give yourself that confidence if you're not. It's like the people who are like, oh, if an emergency happens, I'm sure when mom or dad dies or they get sick, then I'll call the attorney that I don't have right to help with probate.

Rick Luchini (23:36):

I worry about it. Well, that's something that we see in our industry a lot is I will worry about it when I feel pain.

Hamilton Brandenburg (23:45):

Even more self delusional is like, I will become a rock star at handling crisis when crisis appears. Now I'm not a rock star now, but I'll be a rock star. I'm going to be a freaking Thor. I'm going to be like the mighty Thor just swinging my hammer when crisis happens based on preparation that I haven't done today.

Rick Luchini (24:03):

How are you going to handle it and do you have the confidence that you can get through that? And part of that is our job. Here's what happens if the market goes down, let's stress test this portfolio with withdrawals and what does it look like? And also something that I see a lot of stunned faces and it just seems obvious to me, but I want to bring up is, and not get too technical, but you don't have to take equal amounts or proportionate amounts, I should say, from every account. Everybody wants this, all of them proportionately stay the same for the rest of their life. There's a lot of scenarios where I drain an account in your first three years because I know it's in different places. In Pennsylvania, we've got a really good health insurance marketplace specific for Pennsylvanians, and you should see the shock on their face when these people come in, I'd love to retire at 62, but health insurance is going to cost us.

It's not. Let me show you how. And all you need to do is manipulate your income in a way that you can get these tax credits for your health insurance. That might mean not touching your IRA for a few years and draining down some of your other accounts. And it's okay to do that and not just for health insurance. There's other reasons to do it too, but when you manipulate where the money comes from based on what the stock market's doing, maybe one account's more conservative than the other, or based on needing to keep your taxable income at a certain amount for a certain period of time, you can manipulate where those dollars come from to get a more optimum result and then pull the other levers later. And it's just something that for some reason, the same reason why like a saver doesn't want to spend, they like to see all those, well, I couldn't possibly take that much money out of that one account. It's not that one account is part of your whole picture. It's the same thing. So it's just some of those perception things that people need to get over and look at it as a full picture rather than compartmentalizing different accounts or things like that.

Hamilton Brandenburg (26:31):

Well, we'll have a lot of people too, especially I have quite a few clients who are octogenarian and they're widows, so they survive their husband and sometimes their smallest investment account is their traditional IRA, right? If there's been good planning, they probably have a brokerage account, they have a Roth IRA. And with the changes that have happened in the last few years, if a non-spouse inherits an IRA, that becomes a 10 year tax time bomb, right? So if you're 80-year-old sue and you think, Hey, hopefully I've got 10 or 20 years left, you're probably wanting to spend down your IRA lot more than your brokerage account because if you're wanting to leave it behind your kids that IRA going to them is probably going to be 20, 30, 40% less because they're going to be forced to withdraw the full amount in 10 years, whereas your other assets, you're going to be able to leave to places with more favorable treatments.

So a lot of times, yeah, like you said, there are periods in life where maybe from 60 to 65 you're not spending the IRA very much. You're trying to keep your income low to get your tax credits for your marketplace health insurance, and then from 65 to 73, maybe you're taking a lot out of it and converting its Roth and doing all these things to try to mitigate future taxes. So you have to be flexible and not have the plan. Right? Unfortunately, good, bad or indifferent, life is too complicated to have the plan that never changes and you just set it and forget it, not if you want to maximize things anyway.

Rick Luchini (28:10):

Right. No, I totally agree. And I think that's the lesson here is you need to keep changing it or at least reviewing it and verifying that it's staying the same because it should stay the same, not because I just didn't do anything. And that's the takeaway is there is no set it and forget it. And again, it doesn't mean that doing the wrong thing is going to make you run out of money and have to move in with your kids. It might mean that you die with a hell of a lot more money than you wanted to. There's just a way to strategically plan and continue to update that based on what's going on around us. The tax code changes, all this stuff, the market changes, all this stuff changes. So somebody like you or I are going to build this plan based on today, but also make it very clear that as soon as the ink dries on this thing, it's out of date. And this is a starting point baseline, and the real value is the ongoing changes to keep up with what you're doing in your life, what's going on in the world, all that sort of stuff. Same thing, we're going to do our best to try to pull out of you how you're going to spend money in your retirement, but guess what? It's going to change.

Hamilton Brandenburg (29:32):

One of the things, a quote I love on it is it's actually about invading Normandy. It's not about financial planning, but Eisenhower said that plans are useless but is indispensable. Yeah, that's it. Yeah. The more we put forecasts and we predict and we model out what the future is going to look like, the more wrong we are. The most important thing is just that we have a process for reviewing and evaluating are we on track? Are we doing okay? And what tweaks do we need to make today and really just focus on controlling what we can control. So on that note, I was looking forward to this conversation. I want to ask you, and I hope I don't steal too much from your direction you're taking this, but tell me of your work in retirement distribution planning and working with people. What are some things that you think surprise people who are getting ready to retire and you start going over what that might look like for them? Do you find areas that they're surprised at or where you get a lot of

Rick Luchini (30:27):


Hamilton Brandenburg (30:28):

Big eye moments?

Rick Luchini (30:29):

Yeah. Well, if it's pre 65, the health insurance is a big eye moment. And if you're interested in that and you're actually we're coming up on half an hour if you're actually still listening to this subscribe or follow because I actually have some specific ones about Pennsylvania penny insurance and stuff like that coming up, but that's a big one. I'll tell you another one that is like, oh yeah, is converting in their mind what their salary is to what they actually need to spend,

Start taking away your percentage for your 401k contribution and state and local tax and social security and Medicare tax and all this other stuff. And all of a sudden what you tell people you make and what you actually get deposited into your bank account and need to spend are two very, very different numbers. So when I show you what withdrawals we need to take out of your portfolio in the first year and you're like, that's not enough. It is because your salary isn't anywhere near what you're actually netting. And it seems obvious when I say it like that and they're like, oh yeah, but just do the math and start. I mean it's like for most average people and your federal tax rate will be lower too likely. We're talking 30 plus percent discount right there. When you add all those things up, it's a moment where they start to get a little bit more comfortable like, oh yeah, because before they come in, they do the quick mental math of the four or 5%, and then they compare that to their salary and they're like, oh shit, there's no way this is happening. And then when we actually show 'em how it works and then start drawing double social security and all this other stuff, they get a lot closer, a lot faster, and their dollar goes further when you show 'em that.

Hamilton Brandenburg (32:34):

I think too, one thing that I've noticed, and I think you and I talked about this offline before is though when people make that transition from, I've never really worried about taxes because they were just withheld from my paycheck and they were always right and I always got a refund, and now I have this big huge traditional IRA that every distribution is taxable as ordinary income. And by the way, those taxes affect my medical insurance premiums. Even post 65, you have income adjustments for your Medicares part B and D based off of your adjusted gross income and

Rick Luchini (33:11):

How much your social security is taxed and all the things.

Hamilton Brandenburg (33:14):

Yeah, so I would say there's a big surprise when you start looking through cashflow and we try to be careful not to overwhelm our clients. We don't want to create a lot more frustration and uncertainty, but a lot of planning does need to go into income tax reduction and retirement because it's like if you just leave it alone, it's like, I don't know, putting a floaty out on a lake, it's just going to blow away in the wind. It's going to get out of control. If you don't do any kind of tax planning, you're probably going to have a pretty unfavorable tax situation because the chances of getting a hundred percent of everything are pretty low. There's enough missteps that you need to have a good forward-looking tax plan, even if it's not perfect, even if you know it might change. You need to have some kind of idea for how do we handle social security taxation, Medicare part B premiums, how do we handle this big IRA where once we get in our seventies and eighties, we're going to be forced, we're going to have to take mandatory distributions out of that account and those distributions could be higher than what I need to live off of.

So what are some things that I can do in my sixties

Rick Luchini (34:24):

If you did nothing on that example, I've print out, do nothing like the current plan versus the proposed plan. Do nothing and print out a cashflow statement of the next 30 years and show your client that has a big IRA and the first thing they're going to do is, what the hell is that? Because all of a sudden everything's normal. Everything's normal. All of a sudden there's this big, huge, oftentimes six figure taxable distribution that comes out. Well, let me see, you're 73. That's called required minimum distribution, right? I mean they don't get it because it's not really explained upfront what that means. And

Hamilton Brandenburg (35:11):

I was going to say, and unfortunately a lot of firms are not really talking about taxes in retirement especially, and I don't mean to be negative at all, but a lot of bigger national firms for totally understandable reasons. You have, if you have 20,000 employees, you have a lot of liability to cover, especially if you're not doing a lot of in-depth training. I understand that. However, I think a lot of times the end result is that the retiree, the middle American who is just working hard and trying to fund their dreams, a lot of times they're left holding the bag because their investment professional is having zero conversations with them about the tax implications of investment decisions and their CPA, and this is not a rip on CPAs, but their CPA is living in the range of three years. They're thinking last year's taxes, this year's taxes, next year's taxes, nobody's thinking or even having a conversation with a client about what do you need to be doing between 62 and 72? So that way when you're 82, you're not way overpaying on taxes and you can lower your lifetime tax bill. Nobody's really having that conversation. At least not many are. And I think that's a huge disservice

Rick Luchini (36:22):

That's happening. You're right. I mean there's a lot of other things that go into it, but the big one that you're referring to there is Roth conversions, and that's another big eyeball moment when I show somebody, Hey, this is what I'd like to do between 65 and 72, here's why I get didn't know you could do that. Never heard of it. It's something that is almost ad nauseum. People like us are talking about, we keep beating this up, this is the new cool thing. But then I have regular middle class person comes in tomorrow, they ain't never heard of it in their life. And they're like, oh, that actually makes sense to me.

Hamilton Brandenburg (37:03):

So how do you explain Roth conversions to somebody who has made their living doing other things in finance, doesn't give a crap about investments, but you're working with them on their retirement planning. How would you walk a listener through what a Roth conversion is and why would you even do that? Well,

Rick Luchini (37:19):

It would be easier with a sharpie and a piece of paper because that's really what I do is I draw circles like buckets and show transfer this over here, pay the tax in the middle, drops it over here. But essentially in short, what happens is, and what we're referring to is your IRA likely is going to keep growing because you're going to spend less than its growth in the early years if you have other accounts. When you turn 73, the IRS is going to require you to take out a required minimum distribution of what is a much bigger number likely than it is today. And so that creates a tax burden. And what the Roth conversion strategy simply put is we start taking dollars out of that IRA transfer it into a Roth, pay the tax on it to keep you under a certain tax bracket.

So that's why, again, every year it's different, right? This year you did that extra vacation and we had to spend more money. So the Roth conversion amount's smaller because we're only going to take out enough to keep you under a certain bracket for everybody that's different depends on what the money was put in, where we're going to start paying the tax on that money at a lower rate now so that when you are 73, that require minimum distribution is much smaller and all the growth that we're getting in the transfer to your kids is now all in a Roth and it's tax free.

Hamilton Brandenburg (38:59):

And some of the questions that we get too, and we try to remind clients like a Roth conversion, you've pointed out it adds to your taxable income today. So it's a way of paying your taxes sooner rather than paying more of them. And the other thing that we remind people is how much you convert, there's not a limit on how much you convert, right? It's not like the contributions where like, oh, I'm stuck at 8,000 a year that no, no, your contributions and your conversions are totally separate. So it's like the IRS's way of saying, Hey, if you want to go ahead and pay us taxes on extra income right now, do it. Go for it. You want a million dollars in extra taxable income you do. You fam

Rick Luchini (39:40):

Longer withhold. It's our job to say this year we should convert 22,000 because of this reason. Next year it should be 36,000. It's our job to do that. And here's another point again without trying to get too technical. Two things that I bring up when we're looking at Roth conversions. One is the timing. It's not always going to be perfect, but the traditional approach is figure out the number at the beginning of the year, converted at the end of the year because if something changes throughout the year and you decide to take more money out than you told me, then you don't go over your tax bracket. I say forget that if you know the number in January or February and the market's down in March or April, that's when we're converting it because if $10 goes to $8 and we move it over into a Roth, we only paid tax on $8, it's going to come back up to $10 in the Roth and we just got 20% tax free right there in a couple months.

Hamilton Brandenburg (40:44):

And I think too, just to have the conversation with the clients is you're already doing more than most of the big national investment firms are doing at all because there's so much, again, not to beat up on them, but so much understandable, CYA that happens of not wanting the liability of being wrong. But to me again, it's such a disservice because every transaction, and let me back up and say this, most clients, they might not know what a fiduciary is, but they probably heard somewhere that they should work with a fiduciary, somebody who acts in their best interest and that's important to them to a great degree. They just kind of assume everyone is. But my thing is like, okay, well if there's this rule about being a fiduciary, how can I truly say I'm acting in someone's best interest if I'm not considering the tax implications of an recommendation, right? Yeah, that's right. I wouldn't tell somebody, Hey, you should invest this way if I didn't go over the potential risks of investing, of losing money, of it growing. So why would you do that with taxes? Why would you not take the same approach and say, if we're going to take money out of an ira, this is, it's basically the butterfly flapping its wings in Brazil that could cause a hurricane in Fort Lauderdale, Florida because it's affecting an ecosystem of other things like your insurance, your Medicare premiums, and your future required distributions.

Rick Luchini (42:07):

And I can tell you too, what I notice is for the people that live with under their means, like you gave the example, a couple million dollars, barely spends anything, owns the house, owns everything, not wanting for anything. The last thing they want to do is pay any taxes on money that they're not spending and they don't want to touch their 401k because they babied it and grew it and they sacrificed to grow it. And it's an education process to say, no, no, no, you need to start moving this in this way, pay these taxes today because if not, here's this big explosion that happens that you're really not going to like down the road. And to that point, I'd be curious the way you do it, I mean I know it's different for everybody depending on what their means are, but do you go in a perfect world bucket of IRA money bucket of non IRA money, are you moving the IRA dollar to the Roth dollar for dollar and paying the tax out of a brokerage account or savings or are you paying the tax in the middle and having the smaller amount end up in the Roth?

Hamilton Brandenburg (43:28):

Yeah, it really depends on the client. So I know people love to make fun of how often we get asked a very simple question and we answer it like we're running for office. But it depends on the client. One of the things that I think most of my clients, if they look back on any regret in their life, a lot of times what they regret is that they didn't fund a brokerage account better, right? They wish they had more money that was not in an IRA or 401k where they just had flexibility on how they spent it. So most of my clients have like a million to 2 million and most of that's in their 401k or their IRA and they might have a hundred to 200,000 in a brokerage account. So a lot of times when we're looking at how do we pay these taxes, sometimes the best way to do it is just to withhold it from the IRA distribution and process it that way and have at this time we use Fidelity to manage our investment.

So we'll have Fidelity withhold taxes on the conversion, but occasionally we'll come and do scenarios where clients have a good bit of money that's held maybe in a brokerage account or maybe they sold a rental property or another investment property they owned and they've got a pool of money and we might look at paying the taxes from that. It just really depends on the client and what do they have available to pull from. But a lot of times, like you said, if we can, we like to pull that money maybe from their brokerage account from some cash that's already available.

Rick Luchini (44:48):

They just need to be aware of what's available. Because what that does is you're getting that dollar, you still have access to that same dollar in the Roth right away.

The difference is now you have one full dollar growing tax free rather than 80 cents growing tax free. So when you can do it and it makes sense and it doesn't drain their other bucket down to nothing or stresses 'em out, it really does make sense to do that. And just like everything else, it's not an all or nothing game. You don't have to do all of it or do one year one the other. That's the whole point is review everything each year, make a plan for what makes sense right then and there, then adjust as you go. You don't have to sign in blood that this is how I'm going to do my Roth conversions or this is how much I'm going to withdraw for the next 40 years. You only do that when you get one meeting and then here's your plan and go away. When it's a constant update, you're making a decision based on what we know today with the flexibility to change it tomorrow.

Hamilton Brandenburg (46:02):

And to your point, a thing that I will remind clients, because sometimes when you do one or two Roth conversions, they just love them. They're like, oh my god, can we do more? And I'm like, okay, yes. However, it's possible to convert too much. You can get to the place where it might be good to keep some money in a traditional IRA. Maybe the only amount you're going to pull out of that regular old IRA is just your standard deduction and all your other income sources will come from tax free or social security. Maybe you'll be in a situation where you use that IRA to give your tithe to your church every Sunday, and you're going to do that in your seventies in a tax free manner is what we call a qualified charitable distribution. So I tell people Roth conversions are flashy and they're all over the headlines. They're cool, they're

Rick Luchini (46:50):

Sexy. We get excited about it, right?

Hamilton Brandenburg (46:52):

Yes. We can

Rick Luchini (46:54):

Talk about is how can we structure what your specific situation is to pay the least amount of tax over your lifetime with the knowledge that we have today. And for some people, like you said, some people that have the smaller accounts, it might not make sense to do it at all because their withdrawals are what we would want to convert, and then that's what they need for cashflow. There's no sense going over that and bumping them up and paying a higher effective rate, just leave them in the account and withdraw it until you die.

Hamilton Brandenburg (47:28):

I have,

Rick Luchini (47:28):

We tend to want to, I do anyways, because I'm curious what you're doing. You're curious. I want to get more technical on it. And that's not what we're doing here today. So we can save that X's and O's stuff for another one. And I think we should do that. But let's just wrap it there and say, tell us what the key takeaway, if you could just, I just really wish people got it. What's the key takeaway? And then tell 'em how to find you.

Hamilton Brandenburg (47:59):

I would say retirement, one of the big takeaways is it's not going to be like you thought it would be for better or for worse. Your retirement is probably going to look very differently from how you envision it, hopefully for the better. And so going into it, it's good to go ahead and make up your mind that you're going to start planning for contingencies. Don't assume that when a crisis happens that you're going to turn into a superhero and all of a sudden be really comfortable and competent handling it. But just honestly, 80% of the battles are showing up. Just show up, have a plan in place, make sure you cover your bases, cross your T's, dot your i's. And if you enjoy reading the ramblings of somebody who cares a lot about retirement distribution, they can check out our website at brandenburg fs com and we occasionally will post newsletters and blog posts and stuff there and retirement resources because that's something we're passionate about educating people on.

Rick Luchini (48:58):

And maybe he'll be rolling into a town near you and

Hamilton Brandenburg (49:01):

That's right

Rick Luchini (49:03):

Wheel any day now.

Hamilton Brandenburg (49:04):

That's right. Yeah, the roadshow. Haven't quite along with wrapping the RV or anything, so we don't have any wrap on it yet. Brandenburg Financial wrap, none of that.

Rick Luchini (49:14):

Nomad Financial tm. Yeah, I'll take a cut of that. No, I think that's a good place to stop there. I appreciate you being on and I definitely, I want to do this again because we've got a lot of different places we can go. We can go highview, we can go technical and I'd love to have you back.

Hamilton Brandenburg (49:32):

I love it. Well thank you so much.

Rick Luchini (49:34):

Alright buddy.

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Content Disclosure: Luchini Financial LLC is a registered investment advisor. This content is provided for informational and educational purposes only and is not intended to be personalized investment advice, nor a recommendation to buy or sell any investment. Luchini Financial works closely with each client to gain a full understanding of their unique situation prior to rendering advice. The information contained herein is derived from numerous sources, which are believed to be reliable, but not formally audited by Luchini Financial. Information may include statements which are time-bound and subject to change without notice or opinions, which may not come to pass. Please consult Luchini Financial with any questions.

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