086: Monetary Moments – Your 70s

Full Transcript

Intro:

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. Today, we’re going to be wrapping up our series called Monetary Moments, and if you missed the other three episodes, this is a plug, but go back and listen to those. We talked about things, financial, you should think about and do in your 20s and 30s, in your 40s and 50s, in your 60s, and then today, we are going to be talking about, last but not least, the age group of really anyone north of 70.

Josh Robb:
Yeah, that’s right. And it’s really been a great series, and this last group, I’m pretty excited to be talking about, because really, all of those prior episodes build up to this group of people who now get the chance to use all those assets they’ve accumulated to spend and enjoy all that hard work that they built towards.

Austin Wilson:
It’s true, and you know what, there are people in their 70s, so someone’s going to want to know about what to do, and when you’re leading up to it, it’s good to know about the other end of things too. So, this is going to be a pretty good episode all together, but like you said, this kind of puts a bow on the hard work that you’ve done in your 20s all the way through your 60s and leads you up through your later years in life.

So, let’s talk about numbers because we talk about numbers on this show.

Josh Robb:
That’s right.

[1:38] – Net Worth 

Austin Wilson:
We like numbers, we’re a little nerdy, and we’re going to talk and we’re going to use the term net worth today. And net worth is not something we’ve used too much on this podcast, but net worth is essentially your net worth, right? It is your assets minus your liabilities. So, all the things you own versus all the things you owe, and that gets you a net worth.

Josh Robb:
Yep, so net meaning the difference between those two, and worth, what’s your value, right? So, that’s where that comes from. The reason we’re using that, though, is in 70 plus year-olds, your total assets are what’s there to provide for the rest of your life. So, we’re looking at net worth because at this point, it’s not just going to be retirement accounts, there’s other assets available for you to use in retirement, so that’s why we’re using that.

Austin Wilson:
Yeah, Bitcoin.

Josh Robb:
Whatever, either, anything.

Austin Wilson:
That’s going to be an asset.

Josh Robb:
It is an asset class.

Austin Wilson:
All right. So, numbers. The median, so that’s the middle, that’s not the mean, that’s not the average-

Josh Robb:
No the average.

Austin Wilson:
… this is the middle, and this kind of takes away some of the skewing of some really high net worth people in the country. So, the median or the middle net worth for people between the ages of 65 and 74, so right around that 70 figure, is $266,400. When you step that up to 75 plus, your net worth has actually, in median, gone down to $254,800. And that is some pretty shocking numbers to me.

Josh Robb:
Yep. And again, the median is the middle number out of all those, so 266,000 heading into right around that 70 age. And by the way, the Fed uses the 65 to 74 age range, that’s why we pulled that number, but in general, that’s a good reference point, and then the 75 plus looks, really, at 75 years old, kind of where that starting point is. But it goes down because… and we’ll talk about this in some of the planning side… there are some required distributions out of certain accounts that are forced out, and in general, people are living off of their investment, so it’s not unusual to see a little bit of a downward slope there.

Austin Wilson:
So, looking at averages or the mean… we’re not really aiming at that, but to talk about how skewed that really is. Due to some very, very wealthy people bringing the average up, the averages or the mean of those age groups, so between 65 and 74, the average net worth is 1.2177 million dollars. That’s a big difference from 266,400. And then the average or the mean of 75 plus is 977,600. These are the same sort of reasons why that goes down that Josh just mentioned, it goes for there as well. But big differences when you look at mean versus median.

So, Josh, talk about the life expectancy and how that has an impact on financial planning at this point in your life.

[4:28] – Life Expectancy’s Impact on Financial Planning

Josh Robb:
Yeah. So, if you have median of $266,000 heading into your 70s, the life expectancy at 70 for a male is 14.4 years or 84.4 years old.

Austin Wilson:
84.4, those actuarial tables. They’ve got decimals.

Josh Robb:
Yes. And then for a female at age 70, they live a little longer at 16.57 years or 86 and a half years old. So, again, that starting point, if you have $266,000, that needs to last, on average, 12, 14, 16 years, somewhere in there. Life expectancy, some people live longer, some people live shorter, that’s why they have that number, but that’s kind of that starting point and what you talked about the surprise or the $266,000 to last for almost, let’s just say 15 years, the middle between those two. That’s a not a lot of money for that to last. And this is your net worth, not just your investments, but your overall net worth.

Austin Wilson:
So, a little side note here. Guys, if you would like to have the romantic notebook death where you both die in the bed at the same time, you need to marry someone who’s two years younger than you. So, this could be applicable to those in their 20s and 30s, or later.

Josh Robb:
There you go. Yeah.

Austin Wilson:
So, there’s just a little side math for you. Aim two years younger, guys-

Josh Robb:
Then you’re all set.

Austin Wilson:
… then you’re all set.

Josh Robb:
Along with that, when you’re looking at this life expectancy, we suggest you plan for living beyond that-

Austin Wilson:
True.

Josh Robb:
… because what you don’t want to do is run out of money.

Austin Wilson:
The last dollar.

Josh Robb:
Yes. You don’t want to say, “Okay, 14 years divided by my net worth, that’s how much I’m spending per year.” Again, they use these life expectancy tables as a way of setting up certain calculations. It’s, again, takes averaging out life expectancy, some people live longer, some people have shorter, and by the way, with advancements, people tend to live longer over time.

Austin Wilson:
Oh, yeah.

Josh Robb:
The group that are in their 20s, chances are they’re going to live longer than their parents’ age group when they get to that age.

Austin Wilson:
Who have lived longer than their parents, who have lived longer than their parents. For sure.

Josh Robb:
Yeah. Along with that the AARP had some other data. One of the things that I found interesting is that 23% of people in their 70s were continuing to offer financial support to their kids. And so, something to keep in mind when you’re planning for retirement is there may be other costs associated with that retirement piece, so adjust your lifestyle and your needs.

Austin Wilson:
Right. But also, if you can at all avoid it, don’t financially support your adult children. Period.

Josh Robb:
Yep. Now, it goes the other way too, is I’m guessing there are some people in at least their 60s, but probably in the 70s, also taking care of elderly parents, because they could be in their 90s at that point and need some additional care. So, you’re kind of stuck between taking care of two different generations at some point in time.

Austin Wilson:
Sounds expensive.

[7:17] – Estate Planning

Josh Robb:
It does. So, just keep that in mind, and we’re going to talk through some of those things as we go into it.
So, let’s start with estate planning because that’s the exciting thing everybody thinks about. I need my estate plan front of mind all the time.

Austin Wilson:
Well, I mean, just put the rubber to the road, this is the time period in your life when this is going to be most impactful. This is what you’ve been planning for, for your entire life, and you’ve been building up assets over time, and it’s just really important at this time in your life to know that you have a plan.

Josh Robb:
Yes. And that plan may have changed over the years, and so-

Austin Wilson:
In fact, it likely has.

Josh Robb:
… make sure that if you already did a will back in my 40s, or whatever, well make sure it’s still up to date and reflects your current needs and the current tax laws, because things change, you may update how things are titled or who you’re giving them to, trusts are important as your family may have grown, you may have grandkids now in your 70s. Are your trusts worded correctly? Are the people who get the money the ones that you want? Also, are there any special situations in your life, your family, where a trust may be beneficial, whether it may be a kid or grandkid who does not do well with money, and so you want to protect them from that money, or maybe there’s a special needs or some sort of issue where you say, “Okay, for whatever reasons, control can’t be given, but someone needs to be in charge of this asset and provide for that person.”

Austin Wilson:
And your family may have changed. So, unfortunately, someone may have passed away. That changes the wording of all of these documents, but also you may have gotten married, or your children may have gotten married, or all of these things need to be taken into consideration when you’re looking at that estate plan in general.

Josh Robb:
Yeah. And speaking of that, there may be a second marriage involved, or when you get into your 70s, sometimes one spouse pre-deceases the other. Think through those plans because most states default to the spouse being the primary beneficiary unless it’s stated elsewhere. And so, you may be leaving your assets in a way that you may not have intended based on some changes in your life situation.

Austin Wilson:
Absolutely. So, Josh, I know that that was probably the highlight of the show for you, talking about estate planning.

Josh Robb:
Yes, estate planning is so much fun.

[9:28] – Insurance  

Austin Wilson:
But I don’t think it should be outdone too much, but insurance. Talk about insurance. There’s a couple sides of insurance that are really important in your 70s, there’s three buckets I’m thinking. So, first of all health insurance. So, you’re likely utilizing Medicare at this time.

Josh Robb:
Yep, at 65 years, if you’ve earned and worked, you have eligible for. Medicare is the primary insurance for most people at 65 plus. So, Medicare’s there. You have to provide supplemental for most situations. Medicare does not cover everything, and so there’s Part A, Part B, and then you need some supplemental Medigap policies. That’s always important. As you age, keep in mind every year, you can change those Medigap policies. And so, if you have a certain prescription or something you know you’re going to need, find the policy that gives you the best deal for that. So yeah, you’re right, that’s always worth checking out. Medicare has great coverage and they’re always tweaking and adjusting it, but there’s usually some sort of supplemental policy on top of that.

Austin Wilson:
Right. So, then life insurance, something to at least revisit at this point in your life. And there’s a couple of different ways to look at that.

Josh Robb:
So, life insurance is two ways. It comes back to the estate planning. Life insurance, whole life, universal life, certain policies can be used in estate planning because it offers a benefit that is not taxable to the next generation, and based on your premiums that you’re paying, and there’s all bunch of fun stuff you can do with that, and naming trusts and all stuff that an attorney can help you with if it fits your situation. But the other side of it is, at this point in retirement, usually, when you retire, you have all the necessary needs to protect you and your spouse or family for the rest of their life to provide for you. So, life insurance for that instance is no longer necessary.

But we are seeing more and more people keep a life insurance policy to help cover some of the immediate needs, because settling an estate could take a while, and sometimes getting a payout from a life insurance policy, depending on who is named to and how its named, may just help whoever is going to be providing for the funeral costs, those type of things. You could have a benefit where they could get essentially reimbursed for those type of things pretty quickly instead of waiting a year plus for the whole estate to settle. So, life insurance, is it necessary at that age? If you’re retired, hopefully, you have assets you need to provide, not necessary, but it could be useful depending on your situation.

Austin Wilson:
And this is an example where we’ve talked about it in a couple previous episodes in the series, but this is the point where you could have a small policy of term insurance that you’ve held on to for a while, but it was part of that life insurance ladder that as you’ve aged, your insurance needs to have reduced and you wanted to have just enough to cover whatever, and at this point in your life you may have just a little bit, which can be very helpful. But you could have taken care of that 10 or 15 years ago or whatever.

Josh Robb:
And then the last one is long-term care insurance. And so, in your 60s is a great time to start shopping for it, but 70 plus is usually when you’re going to utilize long-term care insurance.

Austin Wilson:
I’m already cracking up about the dad joke I’m going to tell you in a minute.

Josh Robb:
You’re thinking about the dad joke and you’re laughing already, but you’re going to have to wait because we’re talking long-term care.

Austin Wilson:
I know. I’m sorry.

Josh Robb:
So, long-term care, though, is therefore, if you end up in a long-term care facility, like a nursing home, that will then kick in and provide that cost. Nursing home facilities are expensive-

Austin Wilson:
They are not cheap.

Josh Robb:
… so that is what it’s there for. I will tell you, though, long-term care insurance is also not cheap, and so you just got to weigh the cost versus self-funding it or not. But while you’re there, check the policy and make sure it makes sense still. Is there a cost-of-living adjustment so that that daily benefit is increasing to keep up with what it would cost you to go in? There’s new hybrid stuff now that you can marry that with like a life insurance policy where you can have a death benefit tied to it. So, just check that out, see if it makes sense for you. But in general, that’s where you get into Medicare versus Medicaid, going back to estate planning, because there are things you need to put into some sort of Medicaid compliant trust to protect those assets. There’s a lot of planning you can do depending on your situation. So, those all tie together, they really do.

Austin Wilson:
Yeah. So, insurance. It’s pretty funny.

Josh Robb:
You’re excited.

Austin Wilson:
It’s not funny.

Josh Robb:
You’re excited for your joke, so go ahead.

[13:22] – Dad Joke of the Week

Austin Wilson:
All right, Josh. Dad joke of the week. This one cracks me up. I’m laughing. I can’t even keep a straight face saying it. Josh, how does a hamburger introduce his wife?

Josh Robb:
I do not know.

Austin Wilson:
Meat patty.

Josh Robb:
Meat patty. I like it. Meat patty.

Austin Wilson:
It’s a classic.

Josh Robb:
Impossible burger can’t do that, though.

Austin Wilson:
No, not meat patty.

Josh Robb:
That’s not patty.

Austin Wilson:
Have you eaten one yet?

Josh Robb:
I have not.

Austin Wilson:
I have not either.

Josh Robb:
I want to, but I don’t want to pay for it if I don’t like it-

Austin Wilson:
Right.

Josh Robb:
… and be stuck with this burger, I have to eat-

Austin Wilson:
Right. I’ve heard really great things.

Josh Robb:
It’s got to be fine. I mean, everybody’s saying it.

Austin Wilson:
It just isn’t – It’s not normal enough yet for me to be like, “Yeah, I’m going to eat that right now.” It sounds impossible.

Josh Robb:
Yeah. I got to need to try it.

Austin Wilson:
It’s too good to be true.

Josh Robb:
Someday I’ll have to try it.

Austin Wilson:
All right. So, back to real life discussions. That’s such a funny joke, though.

Josh Robb:
Meat patty. Yeah.

[14:19] – Investments

Austin Wilson:
Meat Patty. Investments. This is obviously a very important thing, because at this point in your life, you’re likely living off of the investments you’d worked so hard to accumulate over decades, and that’s what it’s for, right? You should be happy, and it should be freeing to have this ability to do this. You’ve worked hard up to this point so don’t feel bad spending your money, but that’s what it’s for. So, you are living off of your investments at this point.

So, Josh, break down first of all… Okay, first of all, I have a question for you. What is the optimum asset allocation for someone in their 70s or above?

Josh Robb:
My answer to that, it really depends.

Austin Wilson:
And it depends on two factors.

Josh Robb:
Yes.

Austin Wilson:
And those two factors are, number one-

Josh Robb:
What your goals are.

Austin Wilson:
… what are your goals?

Josh Robb:
Yes.

Austin Wilson:
Are you going to have the return generated from your investments to meet your goals? And number two-

Josh Robb:
What’s your asset allocation tolerance?

Austin Wilson:
Yeah. Can you sleep at night?

Josh Robb:
Can I tolerate stocks? Yeah. So, it’s for everybody.

Austin Wilson:
It’s probably different for everyone.

Josh Robb:
I mean, for everyone, those are the two main concepts that drive your asset allocation. What are my goals? And how much can I tolerate? But for people that are 70 plus, one of the things we have a conversation with is, what are your goals? And if some of that money is designed for future generations, then the question not only becomes, what is your tolerance, but what is the tolerance for that bucket?

So, there are some clients and people that I know who say, “You know what, this money is not even mine, I’m going to be trying to invest and grow it for the next generation.” And so, they take more of a risky approach to that because they don’t care if it goes up and down because their 20, 30, 40-year time frame doesn’t matter, it’s longer than that.

[15:55] – Sustainable Withdrawal Rate

Austin Wilson:
Right. So, Josh, I’ve heard the old adage that you can withdraw 4% of your portfolio sustainably for the rest of your life and be totally fine. What are some ways that that is true and what are some ways that that might have some shortcomings?

Josh Robb:
Yeah. So, that’s kind of this, again, those rule of thumbs, we’ve been using some of those in the series for how much you should save and stuff. But the 4% withdraw is based on this long-term research that has shown that a sustainable withdrawal rate for a 30-year retirement is this 4%. You take your starting value at retirement, and you can take 4% out and then increase it for inflation over the next 30 years and have a high chance of succeeding. Well, that survey and all that research was done when there’s some higher interest rates, and so the asset allocation comes back to that question, how much can you tolerate? Well, if you can’t have enough in investments in stocks, which are that growth piece, then that 4% rule kind of becomes questionable.

Now, there’s a lot more new research that says 30 years is kind of a short timeframe. If you’re retiring in your 60s and living into your 90s, you’re pushing past that 30-year timeframe. Now, they’re saying there may be a higher withdrawal rate, depending on your ability to make adjustments. Because what happens in real life is people adjust to the environment. So, if you have some down years in the market, you tend to cut back on your spending, that type of thing. And with those adjustments, that 4% rule is still a good baseline-

Austin Wilson:
Gauge. Yeah.

Josh Robb:
… it’s a good gauge of, what could I live off of my portfolio, but it also is not perfect. But that’s a good starting point. If you’re in your 50s and 60s and just trying to get a reference point on that, 4% is an okay number to use as kind of a gauge on a starting point.

[17:33] – Guardrails Approach

Austin Wilson:
So, that ability to flex up, flex down your spending, that’s kind of the guardrails approach, right?

Josh Robb:
Yeah, there’s been some research and that’s kind of what they named it, it’s kind of guardrails where on either end, you have these guardrails in place that force you to make adjustments to your portfolio.

Austin Wilson:
Yeah. Maybe you’ll go up to five or 6% for a couple good years and down to 3% for a couple years or whatever. If you’re willing to do that, you have a better chance of success even.

Josh Robb:
Right. That’s how it works. So, there’s a lot out there that people are living longer, they’re readjusting kind of that analysis and approach.

Austin Wilson:
So, along with the investing theme that we’re talking about, how does account choices at this point factor into a retiree’s specifically overall thoughts on, where they’re pulling money from and when, because obviously, we haven’t really got to it, and we might talk about it, but taxes are going to come into effect here? So, what about account types that should retirees be thinking about?

Josh Robb:
Yeah. So, in your 70s, there are certain IRS rules that start kicking in. The first is required distributions. So, if you have any type of retirement account that is tax deferred, meaning you’ve not yet paid tax on it, the IRS says, “Hey, it’s time to start taking some of that money out.” So, we call those RMDs, required minimum distributions, and every year, after the age of 72, you’re forced to start taking that. Now, there’s some current laws, that number could change. It used to be 70 and a half, now it’s 72. Who knows if they move it or not? There was a proposal to get it to 75. Who knows? It’s up to Congress to figure that out, but right now it’s 72.

At age 72, they say, “Okay, what was the value at the beginning of the year, or your 1231 value at the end of last year?” They take a formula based on your age, run a calculation and say, “Here’s how much you have to take out by the end of the year.” Now, there’s some rules to it. The first year, you have until April the next year, but I don’t want to confuse anybody, just each year, you have to take a certain amount out. It doesn’t matter, when you do it in the year, just by the end of the year, the money has to come out.

So, those are required distributions. A lot of retirees use that as part of their living. That’s right. I have to live off it anyways, I’m going to be taking some money out. A lot of times it’s calculated, actually, close to that 4% rule. It’s not a coincidence, I don’t think. They’ve kind of figured out a sustainability portfolio. So, that withdrawal is required, you’re taxed on it, the IRS gets their money. You could do whatever you want with that money once it’s pulled out of that account. So, IRAs, 401(k)s, 403(b)s, any of those tax deferred accounts have this required distribution.

Austin Wilson:
Now, if you could choose when to take that, because you can take it at any point during the year, you have 365 days to pull it out, would you choose to do it in a time when the market’s up and your portfolio’s up or a time when your market’s down your portfolio’s down?

Josh Robb:
Great question. So, they value the account at the beginning of the year, so no matter what happens during the year, your withdrawal amount stays the same.

Austin Wilson:
Correct.

Josh Robb:
So, yeah, if you take it out when the markets are up, the percentage is actually less withdraw and it started out, so that’s a great time to-

Austin Wilson:
But you’re going to pay more tax?

Josh Robb:
Well, the dollar amount is the same, so you’re paying the same amount of tax either way.

Austin Wilson:
Well, if you took out more money-

Josh Robb:
So, here’s an example. Let’s say you have $100,000 account and your required distribution is $4,000. Okay? If the count grows to $120,000 account, your $4,000 withdrawal is still $4,000 and it’s taxed $4,000.

Austin Wilson:
Gotcha.

Josh Robb:
But as a percent of that withdrawal amount, it’s less than that 4% it was at the beginning.

Austin Wilson:
I see what you’re saying.

Josh Robb:
Yeah. So, from a withdrawal standpoint, yeah, if you wait for the value go up, you’re actually taking less out right than if you wait for… if it goes down to $80,000, your withdrawal just got bigger percentage wise. You’re still paying $4,000 of income, you’re going to pay tax on that, so it doesn’t matter from that standpoint, when you take it out.

Austin Wilson:
So, if you had your druthers, you should probably take it when the market’s up if you can.

Josh Robb:
Right. Or if you want to, like we’ve talked about, dollar cost averaging, if you take it out every month, you’re going to average that portfolio value out for the whole year and smooth that out and not worry about timing.

Austin Wilson:
We love dollar cost averaging. So, it works in, it works out. It’s great.

Josh Robb:
Yeah. And so, since it’s calculated on a set number at the beginning here, the dollar amount is there, when you take it out, it’s more need based more than anything. When do you need this money?

Austin Wilson:
When you have money invested. When you need money, take it out.

[21:52] – Qualified Charitable Distribution

Josh Robb:
So, let’s say you don’t need that money. Let’s say it’s $4,000, like in my example, and you say, “you know what, I have other sources of income, I’m good. I don’t need to take money out of here.” What could I do to not have $4,000 of income show up from that withdrawal? There’s this thing called a QCD, qualified charitable distribution. All right? RMD, required minimum distribution, QCD, qualified charitable distribution.

Austin Wilson:
Questionable contraband distribution.

Josh Robb:
Charitable, meaning I give this money to charity. After age 72, or 70 and a half, just because the IRS likes to confuse everything, 70 and half, you can start doing QCDs even before RMDs at 72.

Austin Wilson:
A year and a half. Although maybe they’ll bump that to equal it eventually, but for now, you get a good bonus.

Josh Robb:
Honestly, I think that was just someone missed it when they made the last tax law.

Austin Wilson:
The bill.

Josh Robb:
I’m going to be honest with you, I think somebody just forgot to move them both. But either way, a QCD, you take the money out of your pre-tax account. Can’t do 401(k), it has to be an IRA. That’s one rule about the QCD, which is crazy. So, out of an IRA, I have to give it directly to a charity, so I can’t take possession of the money, it has to be named to a charity. If I do that, it will not show up as income for me, so I do not get taxed on that if I do the $4,000. No more tax owed by me.

Austin Wilson:
Correct.

Josh Robb:
And it makes that RMD satisfied. So, it’s a way of avoiding tax. If I like to give to charity, after age 72, the most tax efficient way to give to charity is using my required distribution.

Austin Wilson:
Absolutely.

Josh Robb:
So, just something to think about for those in their 70 plus, that’s a very efficient way of giving to charity, is through that required distribution.

Austin Wilson:
So, if during your working years, you get a paycheck and you’re giving systematically to a charity or your church or whatever that may be, you can give to that same 501(c)(3) through a QCD, and you could just do it once a year-

Josh Robb:
Monthly, yearly, whatever you want.

Austin Wilson:
… or monthly or whatever you want, and you’re satisfying your RMD at the same time. It’s a great deal.

Josh Robb:
It’s great. And real quick, there are some caveats to that. There’s a lot of nuances to QCD, so if you’re thinking about doing that, talk to a financial advisor to make sure they walk you through that. There’s limits. You can do up to $100,000 a year, there are rules on who it goes to, how it’s delivered to them, all those different things, so just make sure you talk to an advisor or a CPA or somebody to help you a lot with that.

Austin Wilson:
Ideally, your advisor and your CPA work together quite well.

Josh Robb:
Yep. Speaking of taxes, and that being a very efficient way-

Austin Wilson:
That’s very efficient, yes.

[24:17] – Taxable Accounts

Josh Robb:
… of giving to charity, another efficient way is… and we’re going to get into this because we’re going to talk taxable accounts, because we’re still kind of on account structure. Taxable accounts. If I have low-cost basis and high gain, so if I bought a stock for $10 and now it’s trading for $100, I’ve earned $90 of unrealized gains.

Austin Wilson:
True.

Josh Robb:
If I were to sell that stock, that $90, I would owe taxes on capital gains tax. If I want to give that appreciated security to a charity, I do not have to pay that tax, they get the full value and I get to take a tax deduction. So, another way of giving in retirement for 70 plus years, a lot of times, it’s a way to give.

Now, with cost basis, and it goes all the way back to that estate planning, because really, that drives a lot of decisions in your 70 plus is, well, if I do have a stock that has really low cost basis and high capital gains, I may want to hold on to that as long as it’s still a good company and just give that in my estate, because there are rules currently… again, it’s being debated while they last, but currently, that moves up to whatever the price is for the next generation. So, they don’t owe those gains if they were to sell it.

So, again, back to my example. I bought it for $10, it’s now $100, I would have to pay $90 of capital gains, that would be my gains I would pay tax on. If instead I passed away and gave it to someone else, they would then start at the $100 price. So, if they were to sell it the same day they got it from me, they would owe zero tax even though I bought it for $10. So, it’s nice. It’s again, back to the estate planning, an asset allocation holdings. Sometimes you’ll hold things just because there’s a tax strategy that maybe you can avoid some tax or that your estate can avoid some tax down the road.

Austin Wilson:
Right. And then at that point, once it’s in someone else’s hands, they have a set time period where they need to withdraw that.

Josh Robb:
Well, they’ll start at that cost base. It’s stepped up to whatever the price is on the day of death. Actually, in tax law, then you can choose an alternate day, but let’s not go into that. Let’s just say it’s a day death. From that point forward, any change is their capital gains. And so, if they wait a day and it goes from 100 to $101, they owe $1 of those capital gains.

Austin Wilson:
It’s not like an inherited IRA where you have RMDs on your inherited IRA.

Josh Robb:
Nope.

Austin Wilson:
That’s a whole nother thing.

Josh Robb:
Whole nother. We could talk about that. We have talked about that in tax structures, and we talked about account types in a prior episode. But RMDSs, all that stuff, for the original owner, those start at 72 and go forward, and it’s over their life expectancy, and so every year that factor goes up. So, my example of the $4,000 on 100, 4%, well, the next year is going to be a little higher, and then all the way up. And when you get into the hundreds, if you live that long, you’re taking almost half of the account value out at the very end of their tables because the IRS is saying, “You know what, you lived a long life, you owe taxes. If you’re going to keep this money, it’s been growing tax free for 80 plus years maybe,” who knows how long the account’s been open, “We want to tax them.”

Austin Wilson:
So, you know what’s nice, is that… So, we’re talking about taxable accounts right now, and the majority of investment accounts used to be taxable accounts. Nowadays, it’s the minority of accounts, and nowadays, the bulk of invested money is actually in IRAs, 401(k)s 403(b)s, tax deferred accounts, generally speaking, or post tax dollar accounts, like a Roth.

Josh Robb:
Like a Roth IRA.

Austin Wilson:
So, you can disregard. If you have those kind of accounts in the majority of your assets, you actually get to disregard the cost basis thing for those accounts because cost basis does not matter. There are different tax laws that matter, but cost basis is not one of them.

Josh Robb:
Yeah. Within the account, you do not pay on any transactions on any buys or sells, there’s no gains or losses, you only pay on distributions on that pre-tax accounts, which are then taxed at your income rate.

[28:06] – Social Security

Austin Wilson:
Exactly. So, Social Security, Josh, it’s a portion of people’s financial situation when they get to this point. A lot of people, I would say, probably over count on it for their living expenses as they have that as their sole form of income at this age.

Josh Robb:
Yeah. I mean, if you go back to the median or the mean, the worth is 266,000. It’s got to last 14 years. They’re relying on the Social Security to provide most of their living expense needs.

Austin Wilson:
But it is something that you’ve paid into for your working career and it’s a great thing that you should be able to access, right?

Josh Robb:
Right.

Austin Wilson:
So, talk about Social Security. What age you can start getting your maximum benefits there and how that works with your spouse and then through end of life there.

Josh Robb:
Yep. So, at 62, you can start claiming. Full retirement age is right around 67, based on your birth date, they’re moving it up to 67. And then from 67 upwards, you get an increase in how much they’ll pay you if you wait. It’s kind of a motivation or incentive to wait longer to take Social Security, up to age 70. At age 70, they stop, they cap it, that’s the last point you can claim it, that’s when you want to claim it if you waited. There’s no point of waiting any longer. Once you do claim it, you get paid monthly. With the Social Security, they send it to your bank account, it’s great. You have your Medicare deducted from there, so that pays for the Medicare piece that’s your cost, but you can also have taxes withheld there so you don’t have to worry about it.

But what’s nice is Social Security historically has kept up with inflation. They have an inflation tracker that they use and then they make an adjustment to Social Security, and historically, it’s kept up. So, what you get at the beginning of retirement, you can buy the same amount of things at the end of retirement because Social Security historically keeps up with inflation. So, that’s the good news, right? Not a lot of pensions and other pieces have that. So, Social Security does increase with inflation.

Now, when it comes to payouts, you have some choices. You get what you earned during your working career, or if you’re married, and there are certain rules on how long you’ve been married, all that fun stuff, you can get half of what your spouse earned, whichever is higher of the two. And you really don’t have to choose, the IRS says, “We’ll give you the higher benefit.” When you say you want to claim Social Security, they calculate and give you the highest benefit available. But those are kind of the two choices. There were a lot of fun things you could do about filing or suspending and all that.

They’ve closed a lot of those up just because people were taking advantage of them. But in general, you get yours, whatever you earned, or half your spouse’s while you’re both alive, and each claim whatever is the max benefit for each of you. If one of you pass away and you’ve been married for a certain amount of years, you can then keep yours or the full amount of your spouse’s, whichever is higher, you don’t get both, you get one or the other. So, example, let’s say my Social Security is $1,000 and my spouse’s is $2,000. All right? So, if my spouse was to pass away, mine would go from 1,000 to 2,000. I wouldn’t get three still, I would just get the higher of either my spouse’s benefit or whatever I was getting. But that’s just something to keep in mind along with it.

But Social Security, it’s the safety net there. It was originally designed as the spot that you’re living the later part of your year where you probably can’t work anymore that is there as a safety net to keep you at least fed and sheltered and all that stuff.

Austin Wilson:
Right. It was not designed to be the sole provider for a thriving retirement lifestyle.

Josh Robb:
No, that’s not what it was made for, but it is there as that safety net.

Austin Wilson:
But this is why we encourage people to aim for bigger numbers than the middle of the road that we talked about earlier, because if you have a net worth closer to the middle of the road numbers we talked about, you will probably be relying more on Social Security for more of your retirement income than elsewhere.

Josh Robb:
Yep.

[31:46] – Medicare

Austin Wilson:
So, Medicare. You mentioned it a little bit. It’s deducted out of your Social Security check. That is your retirement healthcare provided by the government for the decades, potentially, at the end of your life. So, talk about that a little bit.

Josh Robb:
Yeah. So, Medicare is health insurance, and what some people get confused with, it is not long-term care insurance. It does not provide, really hardly, any benefits for nursing homes and those type of facilities. It’s there as health insurance. And so, it’s your primary one. Again, the government set it up as this kind of safety net to say, “Okay, at this age, most insurers probably don’t want you on their books because you’re going to be a higher risk, higher cost,” and so they have this here that you pay into your whole working career.

Again, going back to benefit you’ve earned, you pay into this Medicare tax on your income throughout your working career, so that’s what it’s there for. But it does provide hospital care, doctor’s care and all that. So, the Medicare Part A, which is the free part, that’s there, and then Part B is the one you pay for but it’s deducted on Social Security once you start claiming it, and those are there to help provide the healthcare safety net.

Overall, there’s Medicaid, that’s if your assets get to a certain level, they do provide long-term care, but it’s limited in that you don’t get to choose your facility. They’ll say, “Here’s how much we cover. Find a facility that works for it.” But it’s there, again, as a safety net. The government’s job is to set these up to say, “Okay, worst-case scenario, there needs to be this backstop there to help.” Social Security and Medicaid are the two pieces for that.

[33:14] – Reverse Mortgages

Austin Wilson:
Right. And last but not least, Josh, reverse mortgages. I’ve seen Tom Selleck talking about reverse mortgages on TV for years now and he makes it sound like it’s not a bad thing but go into some reasons why you may want to consider something like this. This is a vehicle, it’s a vehicle, and go into some reasons why you wouldn’t also, because there are pros and cons.

Josh Robb:
Yeah. So again, you want to talk to your financial advisor about whether it makes sense for your situation. But high level, reverse mortgage is just taking an asset that you have, your home, and getting paid. It’s reverse mortgage. Instead of you paying the bank to own that home, someone’s paying you for the right to have that home after you’re done with it. And so how it works is there’s all different vehicles now to do it with. You can get a monthly payout, kind of like you paid a mortgage during 15, 30 years, however long your mortgage was, they’ll pay you a set monthly amount for either a set timeframe or the rest of your life, or you can get a line of credit where you can access a certain amount at any point in time for whatever you need it for. There’s different options now for the payout.

Some reasons why you may use it is, one, if you use it like a line of credit, it’s kind of another emergency fund or safety line that if something comes up and let’s say the markets are down, you could tap that and use that as either repairs, living expense, whatever you need, until the market recovers, or if you’re running out of money and you need it. It’s not an ideal way, but it is a way to get some money. They’ll pay out for either a set period of time or for the rest of your life. Now, there are some rules involved. You have to keep the house updated, you have to pay the property tax and insurance and everything, and you have to live there, you have to still stay there. It’s only good while you’re still there.

Austin Wilson:
Right. Now, if you take a reverse mortgage on your house, do you technically own the house still?

Josh Robb:
Yes.

Austin Wilson:
Until the end.

Josh Robb:
One of the big thoughts people have is that you no longer own the house. It’s in a sense of you own the house when you have a mortgage, it’s just you owe the bank X amount and the house is collateral, right? That’s the same thing here. So, reverse mortgages have certain rules and sizes, but I’m just going to use this as an example.

Let’s say you have a $200,000 house, the reverse mortgage company says, “Hey, we’ll give you a reverse mortgage for $150,000.” They want to have some flexibility. Just like a mortgage, you can’t have 100%. $150,000. Okay? Let’s say you use it as a line of credit, and you use 100,000 of that. So, you pass away. They’ll come to the heirs and say, “Okay, you owe us $100,000 or we can have your house and sell it and take it from there.” So, if they really love the house and they want to keep it in the family, they just, from the estate, need to pay $100,000 to make right this mortgage, in a sense, that was still owed on it. So, that is a caveat. You still own the house, but it’s used as kind of a collateral for this payment that they’re giving you.

But in general, ideally what I’ve seen it done a lot of times is, let’s say you sold your family home that everybody grew up in and you downsized because the house was too big. So now you live in a house that no one cares about. It’s an asset you have that, let’s say since you downsized, you paid cash for that, because you had more equity in the home. It’s an asset that no one’s really going to want. They’re going to sell it anyways. You could utilize it using a line of credit or whatever and you in a sense turn it into cash, that equity.

So, am I a fan of it? I’m kind of indifferent. It fits in situations, but it’s really just a matter of understanding what you get and what you’re giving up for it. So, it’s there, it’s definitely not like a, “Oh, no, I’m running out of money.” At that point, you probably don’t have very good credit. When they look at that, they may not give you a very good rate. So, don’t think of it as, “Worst case scenario, I’m going to go to that,” because at that point, it may be too late. Getting it early and having a line of credit, because they’ll increase that over time because your home value grows, that’s probably your better option.

But again, talk to your financial advisor about that, whether it makes sense, because you can also get a line of credit from a bank on your equity and use that. So, it’s just a matter of understanding the differences there. But it’s only available after a certain age. So, you have to be a certain age, and 70 plus works. If it’s actually in your 60s, you’re eligible for it at that point.

Austin Wilson:
There’s two things about reverse mortgages. Number one, let’s just have a moment of silence for Tom Selleck’s phenomenal mustache.

Josh Robb:
Did he shave it off?

Austin Wilson:
Maybe we don’t need a moment of silence, but that is the best mustache on TV ever, ever.

Josh Robb:
It’s a good one.

Austin Wilson:
Number two, $200,000 in your example, now buys a trailer-

Josh Robb:
That’s true.

Austin Wilson:
… in today’s housing market. So, that’s the house no one wants after they retire, but this is a nasty hot housing market, so you have a $200,000 trailer. Josh, any other final closing thoughts on financial decisions in your 70s not talking about Tom Selleck’s mustache?

Josh Robb:
Yeah. The big thing is giving yourself permission to spend that hard earned money, because that’s what we see a lot of times, it’s just you used to have that mindset of saving for so long that it’s hard to kind of flip that switch and say, “Okay, now I have permission to kind of spend down some of these assets.” And then two, just being diligent in planning and not putting off some of those decisions, because the worst thing… and you see this a lot with celebrities, which just shocks me that they don’t have good advisors around them, but passing away without a will or any kind of estate documents in place to put your wishes out on paper.

Austin Wilson:
It’s crazy.

Josh Robb:
Yeah, because you just don’t know, and those are the things that you want to take care of. So, those are the big things is, enjoy retirement, enjoy the hard-earned assets, investments you did. And then two, just make sure that your final wishes are in place so that you can create that legacy to continue on.

Austin Wilson:
That’s right. Well, as always, check out our free gift to you, a brief list of eight principles of timeless investing. These are overarching investment themes meant to keep you on track to meet your long-term goals, which kind of culminate in your 70s plus, like we talked about today. So, that’s what you work for. Check that out. It’s free on our website. It’s just been a great series that we’ve been able to put together and we hope you’ve enjoyed it, talking about monetary moments, those 20s, and 30s, and 40s, and 50s, and 60s, and 70s, those time periods in your lives and the decisions that you need to be making. Hope you’ve enjoyed it. We will be doing more series like this in the future.

If you have any ideas, let us know. We would love to hear from you. And you can email us any ideas for more future series at hello@theinvesteddads.com. Josh, how can people help us grow this podcast?

Josh Robb:
Yep. Make sure you subscribe so that you get our most recent podcast alerts every Thursday. Leave us a review on Apple podcasts. It’s always great there. Also, a shout out our Invested Dads second annual… Oh, this is so long. The Investopedia-

Austin Wilson:
Second annual-

Josh Robb:
…blah, blah, blah. Anyway, check our website out. If you still want, it’s open, you can join at any time, it’s not too late. If you want to jump in and see how you’re doing right now, Austin and I are near the bottom.

Austin Wilson:
At the bottom pile.

Josh Robb:
Which is fine. It’s always fun to see people’s strategies, investments, and since it’s not real money, it’s fun to take those risks and see what happens.

Austin Wilson:
That’s right.

Josh Robb:
So, jump in, join us. All the information is on our website on how to join that as well. But that’s just a fun thing we do every year for the second half of the year.

Austin Wilson:
Yep. And if you enjoyed this episode or have someone in your life who is maybe getting close to their 70s or in their 70s, please share with them. Hopefully, they find it valuable as well. Until next Thursday, have a great week. Bye.

Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.