Why It’s Critical to Go Into Retirement with a Tax Strategy

In today’s Money Marathon Post, we are going to be exploring the optimal retirement fueling strategy for retirement, and to do that, we will use a marathon analogy and talk about what’s the optimal hydration or fueling strategy for marathon runners.

If this is your first time visiting our money marathon series, we are currently using running analogies to show you how you could get more potential mileage out of your hard-earned money.

Here’s what we’ve covered so far:

Strategy #1: Know your why.

Strategy #2: Why you need a contingency plan.

Strategy #3: What to do when your plan hits the fan.

Strategy #4: Should you bet your financial future on Artificial Intelligence?

Strategy #5: Have a backup plan for your plan.

Strategy #6:  Three questions you can ask yourself can help you get more out of your physical and financial fitness.

Strategy #7: Why I Think This Painful Wealth Management Exercise is Also One of the Most Beneficial You Can Do.

Strategy #8: What Happens When You Run a Marathon with No Training, and How That Relates to Your Financial Life.

Strategy #9: Four Things That Could Cause a Financial Crash in Retirement

Now, let’s dive in to today’s topic. We’re going to have some fun today using marathon analogies to hopefully explore how to get much more potential mileage out of your money and your retirement income strategies.

Marathon runners have a choice. When they are fueling or hydrating for a marathon, they could bring some electrolytes with them on their hydration belt. They can stop at hydration or aid tables, which are typically set up every two miles for the marathon and grab a cup of water, two cups of water, Gatorade, two cups of Gatorade, or any combination, or they could just blow by the aid station.

A common fueling mistake is what we’re going to talk about first, and then we’ll talk about how to optimize retirement income and an exercise that you can go through, and finally we’ll talk through some next steps in this video that you can take to secure your future and work towards enjoying the wealth that you have created.

Common mistakes

One of the most common mistakes we see with marathon runners and investors is they don’t have a fueling strategy. They don’t have a strategy to fuel their retirement income and to efficiently take their income when you look at the taxes they have to pay. For example, where to pull the money from, how much to pull out, and how much money at retirement should be tax-free versus tax-deferred.

Similarly, marathon runners often go into a race or a marathon with zero hydration strategy. And that can be dangerous. So, we’re going to explore some of the similarities and some of the challenges that runners and investors have when they don’t have a fueling strategy.

With running (you might know this), there’s something called dehydration. And if you don’t get enough water, it can increase the risk of fainting, heat stroke, and studies also suggest it can reduce performance in runners. That topic is being debated, but one of the studies suggests that if over 2% of body weight is lost, performance decreases because the body can’t produce enough sweat to cool down, which increases heart rate and causes fatigue.

So, that probably makes sense to you. It’s very common. Something, though, you might not know about is a condition called hyponatremia.  And that can take place when a marathon runner consumes too much water, too much Gatorade, or some combination where their cells are essentially overly hydrated. What can happen is the water can rush into the cells in the brain, they can expand, push against the skull, and it can actually lead to death.

Unfortunately, a very young woman died at the age of 28 in the Boston Marathon because of that condition. So, it’s just critical to have a hydration strategy going into a marathon so that you can optimize your results and prevent unnecessary risks, health issues, or even death.

I would not recommend what I did in my first marathon with my hydration strategy, which was just go by a table and if I felt thirsty, drink. I got a message from a friend that said “drink a lot”. So some stations I was drinking two cups. I wouldn’t recommend that; I’d recommend doing an analysis. I’m actually about ready to go out and run, and see how much sweat I lose in an hour. I’m going to do the analysis and then work with my coach to fine tune my hydration strategy for my next marathon.

What does this have to do with money?

So what’s this have to do with money? It’s very similar, I think. For investors, it is critical to go into retirement with a strategy.

If you’re an investor, I would recommend that you do an analysis and figure out how much money do you want tax-free at retirement in accounts like Roth IRAs, Roth 401(k)s, or Roth 403(b)s. And how much money do you want in tax-deferred accounts?  The analysis should give you strategies or recommendations for your specific situation.

And just like runners are all different, they’re different weights and heights and athletic levels, levels of training, different levels of sweat loss. Investors are different. They have different levels of assets. They have different goals. They have different income sources.

That’s why it’s really critical to run a Roth conversion and a retirement distribution analysis to figure out what the optimal mix potentially is for you in retirement, or what that optimal fueling strategy is for you.

Next, I’ll show you a little bit more of what this exercise could look like for you, and then we’ll talk about some next steps.

A hypothetical example

Below, you can see a hypothetical client I made up for Bob and Betty. Bob and Betty have all their money in tax-deferred accounts. You could hypothetically think all their money is essentially in Gatorade and not water. So, yeah, all analogies break down, I get it. But they have all their money in tax-deferred accounts, none in tax-free accounts.

And here’s what we see here. We see there’s this increasing trend at the end of their life. Their tax bracket’s going up after a little dip. And they’re paying more taxes at the end of life than they were in the early stages of retirement.

As you can imagine, Bob and Betty aren’t happy about this. So what we did is we explored some opportunities to move tax-deferred money over to tax-free accounts through Roth conversions. That’s one way you can get more tax-free money built up for retirement. You can also make contributions into different types of accounts.

In this next screen, you can see that Bob and Betty significantly lower their lifetime tax bill by well over a million dollars with the strategy of moving money from a taxable account to a tax-free account. And when that happens, they pay the tax strategically along the way. The benefit to them is there’s more tax-free money later.

Another potential benefit of having more tax-free money is that if tax rates increase, for whatever reason, you have more options to lower your tax bill or control your tax bracket, so you don’t jump into the next bracket.  That’s hypothetically what it looks like in this example for Bob and Betty.

Roth conversions do not make sense for everybody. In some of the work that we do, no Roth conversions are recommended. Before you take any action, it’s recommended to sit down with your advisor, your accountant, and make sure that your strategy is customized.

Hopefully we had some fun today exploring marathon and retirement fueling strategies. If you’re wondering what to do next, and you don’t have the tools or the advice to do an analysis, we have a couple of options for you.

You could click the Get Started button and just request a consultation. We’d be happy to meet with you!

Or, if you just want to explore opportunities you might be missing to optimize your retirement income or lower your tax bill, we have a free tax minimization analysis. You can click here and begin exploring if you might be missing some opportunities.