Sometimes the easiest way to learn about something is make it really simple. Like some of the first true/false tests you might have taken in school, let’s play a round of fact or fiction to test your financial planning acuity.
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Transcript Of Today's Show:
Marc: Hey, everybody. Welcome into May on this edition of Plan With The Tax Man with Tony Mauro and myself because we're going to hang out and talk about financial fact or fiction this go around. We're going to have a little bit of fun here. I've got some questions I'm going to lob at Tony and see if he can tell us if these are fact or fiction. Of course, like anything financial-related, you can almost always say it depends because it truly does. There's all these little variables. But we're going to try to see if we can get him to pin these down just a little bit. And like any of these things we talk about, they're kind of generalities and there's some different varying factors that might play into it.
Marc: So if you have any questions about something that you hear, please make sure you reach out and have a conversation about your specific situation with Tony and his team at (844) 707-7381. But we're going to have some fun with this and see what we get here on financial fact or fiction. Tony, what's going on, my friend? How are you?
Tony Mauro: I am spectacular. It's coming off one of the craziest tax seasons that I've ever been involved in, that's for sure.
Marc: Even more so than the prior year?
Tony Mauro: Even more so than the prior year with all the last-minute tax law changes.
Marc: Oh, very true. Yeah, very true.
Tony Mauro: It was a wild ride.
Marc: It's the wild west.
Tony Mauro: And the IRS, in our state anyway, are just trying to get back to some sort of normalcy and they've been running way behind.
Marc: Yeah. I've been hearing a lot of states have been duking it out with the feds on how they're doing things a little bit differently as well.
Tony Mauro: Yeah, man.
Marc: And that's kind of normal, I suppose, but I guess it's been heightened this past year.
Tony Mauro: Yeah.
Marc: So yeah, very, very interesting. And I'm glad that you're basically through it now. So we're right at the tail end of it. This is our early March, or excuse me, early May edition, so I think you got a little bit more to go, but we're almost there. So let's do some financial fact or fiction, okay?
Tony Mauro: All right.
Marc: Now, as I mentioned before, you could probably say it depends on all of these, and if you really need to, feel free to go for it.
Tony Mauro: All right.
Marc: But it could be in the wording of the statement. So listen carefully and see how you do. Your Social Security can be taxable fact or fiction?
Tony Mauro: That's fact. I hate to say it. But it is a fact. And it does depend on the income, but it can be taxable and you got to watch that on your tax return and in your financial situation quite a bit because if you go over the limits, meaning that if you have money coming in, in retirement from other sources, once you go over a certain limit, depending on your filing status, then that Social Security is taxable, not a hundred percent of it, only up to 85% of it, but a little bit of more income can cause you to have that taxable. Now, these are fairly low limits, so you want it to be taxable. I mean, if you've got any kind of financial plan at all, and you're living any type of retirement, some of your Social Security is going to be taxable. You're just going to have to plan on it.
Marc: Okay. And a couple of things on this. So how often do people actually realize that? Because I think it's gotten better over the last few years, but I know many folks just were like, what, seriously, didn't I pay tax on this, going in?
Tony Mauro: Going in, and which you did. And it usually affects people the first and second year of retirement when they're not expecting it. They'll start Social Security, get almost a full year of it, and then not hold anything out on it, and realize 85% of that was taxable. Now that's not an 85% tax rate.
Marc: Right. Thank you, yes.
Tony Mauro: Yeah. Just the amount, 85% is taxable. But if you're in the 20, 25% bracket, that all of a sudden adds to income and you may end up owing or getting a little less back because of that. I just had it yesterday, I was checking over a lady's tax return, and last year, she got a refund, in 2020, she started taking Social Security, she made over the limit and she owed. And of course, she was asking, anytime you go from getting a refund, oh, and you want to know why. And so I told her, you made enough to where it's taxable and we're going to have to plan for that, or you've got to make some estimates or withhold out of it.
Marc: Right.
Tony Mauro: Otherwise, every year you're going to owe.
Marc: Yeah. And so a lot of times it does catch people off guard. They're just not aware that it is possible. But again, it's not the end of the world. It's just something to be aware of. So there you go. That one is technically fact. It can be taxable. All right. Fact or fiction, Tony, your taxes will likely be lower in retirement?
Tony Mauro: Well, I'm going to say that most planners might disagree because I think they're going to say that that's a fact. I'm going to say that that's fiction because most of the clients I see, generally, the ones that have had a plan and now are starting to execute that plan, they're making as much or more in retirement than they did when they were working and all of their deductions have disappeared. And the deductions that they have now really are charity, medical expenses, and things like that, that they can't get over thresholds. And then all of a sudden it's kind of like, well, I don't have anything to deduct anymore and my taxes are actually a little higher. It's not by a lot. But I think that a lot of times that can be fiction. And like you said, at the beginning, it could go the other way. I mean, the old adage is, well, I'm going to be making less, therefore, I'm going to be in a lower bracket and my taxes are going to be lower. But I don't find that as much now.
Marc: Right. Yeah, and I think a lot of times, I guess, depending on how you're looking at this, Tony, it could be if you're saying total tax, I think in general, because yes, we're not paying FICA now typically, right? So when you're no longer working, there's maybe in total tax, it is less. But if you're talking just the income tax bracket, that is probably a different conversation piece there.
Tony Mauro: Okay. Yeah.
Marc: All right. I don't know why my computer is beeping, but it is. I can't seem to figure out why to shut it up, but that's okay. We're going to keep rocking and rolling here. Financial fact or fiction, this one, I might let you get away with, it depends on this.
Tony Mauro: All right.
Marc: But term life insurance is better than whole life insurance.
Tony Mauro: Yeah, you didn't give me any clue words, so I got to take [crosstalk 00:05:43].
Marc: Better is tough, right?
Tony Mauro: Yeah, better is tough. I'm going to say, here's what I tell clients, I tell young clients if you really need insurance, term is so cheap now, and if you need it to cover if you or your spouse dies and you need it to cover expenses, help the family, term insurance is the better option because it's so inexpensive now. And of course, the old adage is, buy term and invest the difference because whole life and some of the other life insurance policies, you'll pay more but you have permanent insurance generally, that you don't have to worry about. I mean, I loaded up on a bunch of term insurance when I was younger. But I'm coming off of that now because the maximum you can go out is 30 years and then that term runs out. If you outlive the term, now you have no more insurance. Now, I'm ending the years I really need it.
Tony Mauro: But I think whole life and some of these other life insurance policies still have some value depending on what you're looking for. It's generally not the most face amount you can buy. It's generally some cash value, some ability to borrow against, that kind of thing.
Marc: Gotcha. Yeah.
Tony Mauro: A little more involved.
Marc: Like a lot of products, Tony, there's pros and cons depending on what you need.
Tony Mauro: There is, yeah.
Marc: So there's some places where one may be better than the other, but the other may be again, vice versa. So in this situation, that's a little bit of a trick question there. So it's a little bit tougher.
Tony Mauro: Yeah, it's a tough one.
Marc: Tougher to just go fact or fiction on that because the time of life and what you're trying to accomplish with that particular product could make that a true or false scenario.
Tony Mauro: Yeah.
Marc: All right. Another little tricky one depending on how much you want to break this down. Medicare will cover most of your medical needs in retirement. And turning to fact or fiction, and what are we going to constitute as most?
Tony Mauro: Most, right. That's what I was going to ask you. But I would say if you're just going to random right off the top of your head, that's a fact. It's going to cover most. But how much is most? We don't know. And we all, I would assume, know that there are a lot of gaps with Medicare.
Marc: Sure.
Tony Mauro: Most people need supplements and things like that to cover those gaps because depending on your health and your needs that most could shrink down to less than 50 to 40% of it, depending.
Marc: Right. Because we're talking Part A and B. That's covering your hospital stuff and most of your basic doctor visits, but there is that 80/20 split, right?
Tony Mauro: Yeah. Yeah, and [crosstalk 00:08:11].
Marc: So that's if you're saying that's the general use, but there's nothing for dental, certainly nothing for long-term care.
Tony Mauro: No, the long-term care is the big one. Medicare doesn't cover hardly anything there and then you have to use Medicaid or private pay. But most of the people we work with on the financial planning side, we really make sure that they're covered all the way around should they want to be.
Marc: Right.
Tony Mauro: And almost everybody wants to be because well, the retirees do not like spending all their money on healthcare and that's a big cost for them.
Marc: Who would, right? Exactly.
Tony Mauro: Yeah.
Marc: Exactly. And so there's a lot of little ... I mean, Medicare could be a great system, definitely for sure.
Tony Mauro: True.
Marc: But there's definitely some gaps in there so you want to make sure you're having a conversation with an advisor on how to fill those gaps and how to cover some of those differences if you feel like Medicare is going to cover just about everything you need, it's a good chunk of it, but there's still some things that it definitely doesn't. I mean, something as simple as eye care, because it's a surgery like cataracts it helps with, but not just normal eye care visits. So going to the eye doctor doesn't count, but eye surgery does.
Tony Mauro: I'll tell you what, the Medicare is a whole niche. It's crazy what they do and don't cover. I mean, you really have to work with it every day to understand some of those gaps and whatnot. And the normal client, the normal person's not going to know that. And so you really want to make sure that you're covered because you got to have it.
Marc: Yeah, absolutely. A lot of firms actually wind up having a Medicare specialist or they'll freelance with someone who will come in to help sometimes when you have to really get into the nitty-gritty of it. Because it is, yeah, it's definitely its own animal unto itself for sure. All right. Let's do one more here. Fact or fiction, this one's kind of fun. I think some of these, Tony, too, you could also apply a timeline. Maybe sometime before 2000, maybe some of these might've been more fact than fiction or vice versa. But as you get older, we should probably gradually shift from stocks to bonds, fact or fiction?
Tony Mauro: Well, I think the old adage is that was a fact because people as they get to the end don't have time to make up for the gyrations in the stock market. However, I'm going to say, in these days, and I've been telling clients this for about eight years now, that that's fiction.
Marc: Okay.
Tony Mauro: Because all I've got to do is show them, well, if we go into bonds, here's what you're going to get.
Marc: And they're pretty volatile right now, too.
Tony Mauro: Yeah, they're volatile. They're not paying anything. And can you live on this? And most people say, absolutely not, I can't do that. Of course, I get some people saying, "Well, what happened to the 8% bonds?" I said, "Well, you've been out of it in a while."
Marc: You better call up 1986.
Tony Mauro: Yeah. And so they still think they can get 3, 4, 5% on their savings account. But we do go over things with them and we tell them you have to be the one to decide. But I think you need a little higher mix of stocks than in the older days because I think we're living longer and we've got inflation. Things are going up and it's just going to erode your purchasing power, which is going to lead to not that great of an existence over time.
Marc: Right.
Tony Mauro: But you'll some clients that just say, "You know what, I can't sleep at night unless I have FDIC insurance." And if that's the case, then we show them where they're at and try to make the best of it.
Marc: Well, let me ask you, Tony, if you were saying it used to be the case, and you'd kind of maybe lean towards fact that way. If the idea was, and this was the classic idea, was that shifting from stocks to bonds was to reduce risk, right?
Tony Mauro: Right.
Marc: So we would want to keep some money in the market to outpace inflation, but we were going to peel some risk off the table. Well, there's other ways to do that. It doesn't have to necessarily be bonds, right? There's other vehicles out there if you want to de-risk you can certainly talk to an advisor about.
Tony Mauro: Absolutely. There's a lot of different options out there that, yeah, I can get you somewhere between a lot of market risk and then bonds and really get a little hybrid-type of model going.
Marc: Exactly. Yeah.
Tony Mauro: Yeah.
Marc: Yeah, so that's something to certainly think about. So that's kind of along the lines of the classic 60/40 portfolio. And that's just not necessarily the case nowadays, as much as it used to be. So again, every situation is a bit different. So you want to have the conversation to say it doesn't have to all be ... People, we talk about this often, Tony, people feel like, well, it's either got to be in the market or in cash.
Tony Mauro: Right.
Marc: I mean, it's pretty much my only two options. It's like, no, there's a lot of other things. There are so many kinds of investment vehicles in the financial world, it's kind of staggering actually.
Tony Mauro: Today it is. I mean, from back when I first started in the business, well, even before I started back in '87, the amount of different product options today, it's mind-boggling compared to back then.
Marc: Yeah.
Tony Mauro: And most products, in my mind, generally, will fit some sort of investment purpose. Now, it's not for everybody.
Marc: Right.
Tony Mauro: I think some people get out there and they're watching the news and they see the latest and greatest this or that, and they just feel well, if it's out, I should have it. And that's definitely not the case, especially in retirement.
Marc: Exactly. Agreed. Especially in retirement. Yeah. So it's all about finding the right mix of things for you. And some of these things are definitely, some of these things are fact, some of these things are fiction. Some of these things definitely could go with it depends. But every situation is unique, so make sure you're having a conversation.
Marc: But just some basic things to remember when it comes to this week's show, hopefully, you found that interesting. Social Security can be taxable. A lot of people are surprised by that, things of that nature. So as always, follow up with a qualified professional like Tony. He's a CFP, certified financial professional, as well as an EA here in the Des Moines area. But also, he's got clients all over the place. So if you need some help and you caught this podcast, subscribe to it to catch future episodes on Apple, Google, Spotify, whatever you're using. Just hit the little heart button, I think on Apple to subscribe, things of that nature.
Marc: You can also find all of that and learn more about Tony and his team at yourplanningpros.com. That's yourplanningpros.com. You can check him out online and learn more, and reach out to him, maybe schedule some time to talk, whatever that might look like for you. All right, my friend, thanks for hanging out with me this week and playing financial fact or fiction. Hope you have a great week and looking forward to talking to you soon.
Tony Mauro: All right. Thanks, Marc.
Marc: We'll catch you later, folks, here on Plan With The Tax Man with Tony Mauro, from Tax Doctor, Inc., serving you here in the greater Des Moines area. We'll talk to you next time on the show. Stay safe and sane, folks. We'll catch you later.
Disclaimer: Securities offered through Avantax Investment Services. Member FINRA, SIPC, Investment advisory services offered through Avantax Advisory Services. Insurance services offered through Avantax Insurance Agency.
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