The Incomplete Financial Plan

Are you confident that your financial plan is complete? Many people believe they have a solid plan in place, only to realize later that they've missed important areas. From not accounting for long-term care expenses to overlooking the impact of taxes on retirement income, there are many ways a financial plan can be incomplete. On this episode, we'll be pointing out the most common areas people overlook when planning and provide actionable tips to ensure that your plan is as comprehensive as possible.

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Transcript Of Today's Show:

Speaker 1: Welcome into another edition of Plan With The Tax, with Man Tony Mauro and myself here to talk about the incomplete financial plan. Are you confident that your financial plan is complete? Most people believe that they have a solid plan in place only to realize a little later on that maybe they've missed a few important areas. So that's what we're going to do in this episode. Point out some of the most common areas people overlook when planning and hopefully provide a few actionable tips to ensure that your plan is as comprehensive as possible. What's going on, Tony? How are you buddy?

 

Tony Mauro: Not too bad. Coming out of the busiest time of tax season. Still got some ways to go, but-

 

Speaker 1: It's early March, time we're dropping this. So you still got a few weeks, right?

 

Tony Mauro: We still got a few weeks left and we trickle into the summer months with some extensions and whatnot.

 

Speaker 1: You're right, and the heavy throes of it right this minute. So as always folks, do your CPA, and your financial professionals, and tax preparers a favor, try to get that stuff to them as early as possible. Don't be like me and wait till April the 12th or something. They don't like that so much. But if you need some help reach out to Tony and his team at yourplanningpros.com. They are obviously Tax Doctor Inc. Is the name of the company. They are a Des Moines professional alternative, and you can find them online yourplanningpros.com. So let's jump into a list here. I've got a few different things to run through, like I said. Maybe you have some of this going on and it might make your financial plan incomplete. So the downturn we've experienced in '22, that was a rough year obviously for the market. And when it's the early stages of retirement, Tony, it's more detrimental and people [inaudible 00:01:38] are aware of that and why that is something called sequence of return. So let's talk a little bit about why it is a bigger problem if you are retiring in a down year, like in the early days of your retirement versus later.

 

Tony Mauro: And in simple terms really, say you decided to retire at the end of '22. And we did have a down year, although years before, this is different because we've had such a run-up, but if you retire and in the early part of a long prolonged downturn, presumably you've generally got some years left to live and it's going to be very difficult, because you're going to need this money to supplement your living to make that up without taking a lot of risks. And so generally, you don't want to be overly aggressive, I would say. And obviously if you're 90 years old and you have a downturn, it's pretty easy to see. It's a lot different if you're than you're 65 or 70, because you're a little closer to the end. But really you want to make sure that, again, in these early years that you, as you're getting into retirement, even before that, you're switching things up. So number one, hopefully that doesn't happen or if it does not really going to affect you too negatively. But we do see that a lot.

 

Speaker 1: Oh, for sure. And so basically, because, correct me if I'm wrong on this, Tony, but it's like you're basically, if you're going through a major drop, if you're going through what, I don't know what we were doing, let's say 22% or 20% last year or whatever. In the early days of your retirement, it's really going to scramble up your picture, because you're tapping your portfolio as it's losing or after its lost value. And then you're having to sell more investments to possibly raise money to fund part of your lifestyle, whatever portion of your financial plan that needs to do. So it's this double whammy. So you're draining your savings more quickly, but you're also leaving fewer assets in those set accounts that can also regenerate more growth. So it's almost maybe even a triple whammy.

 

Tony Mauro: It is a little bit of that because, yes, with that, if you're already down say, I don't know, 15, 20%, then you're taking out 5 or 6% or whatever that might be, really starts to drain the portfolio quickly. And if that's your main source of retirement income, you have to make sure, well obviously the big one is you're not going to run out of money but it's, again, being different. If you're 90 and all of a sudden you have a little downturn that's not as detrimental.

 

Speaker 1: And downturns do happen. We can ride these out, but just something to be aware of, which again is where the planning comes into place. Because people sometimes will say, "Well, when you're setting up your income strategy, which horse are you going to ride first? The social security horse or your own horse." So some people will say, "Well, I want to wait social security to maximize it at 70," but maybe the strategy looks better depending again on the environment as you're getting close to retirement to maybe take social security a little earlier and right ease off of going into your own accounts until later. Again, it's all timing and it's all strategy.

 

Tony Mauro: It's all strategy especially with the incomes that you can't outlive, which are few and far between today. Social security and then some of us have pensions that we can't outlive, but most don't now. It's social security and whatever you've accumulated in your 401ks or savings. And so it takes a little more savviness to come up with a good plan.

 

Speaker 1: So sequence of return risk can certainly be a problem if you don't have that taken care of and you have it in complete financial plan. And then of course we can add to that conversation we just had by saying the lovely inflation effects over time, even normal inflation, Tony, let alone what we're dealing with right now.

 

Tony Mauro: So I think this is another bad whammy, if you will, especially as we're recording this, we all know what inflation has done for the last year and a half or so.

 

Speaker 1: I think it actually, if time we're taping this or we're just happened a little bit, I think the January, oh, that's right. It was January's numbers. We don't have March's yet. Oh, excuse me, February's yet. It was back up a half percent so.

 

Tony Mauro: It was just about, yeah. And it's trickling back down, but again, take the scenario of a retiree, they could be down 15, 20%, they're trying to take money out and by the way, now stuff costs a lot more.

 

Speaker 1: Yeah. So you're down 15, you're pulling out 4, let's say you're using the 4% rule or whatever, and then you're paying 7% more at the grocery store. It's just not-

 

Tony Mauro: It hurts you.

 

Speaker 1: And you wonder why people are stressed, right?

 

Tony Mauro: Yeah. This is why people are stressed and this is why, although I try to make a case for people that you got to try to outpace inflation a little bit, even when it's low and it's hard to do now and be conservative because it's kind of high.

 

Speaker 1: Trying to find some vehicles that'll help you do that for sure. So yeah, you've got to have it. So again, if you're putting a plan together, you've got to be working with an advisor who's taken into account normal inflation, just at least nothing else they're planning for. Because if we can go into that simple conversation of, hey, if it costs you $5,000 a month to get by now, and even in normal inflationary times, well in what? 12 years? That's going to double, right? 10, 12 years, that's going to double. So then if you have a 30-year retirement, that's going to triple. So you got to make sure that you've got something in there helping those accounts grow to deal with inflation. And then medical cost is going to be number three on there and that typically outpaces regular inflation. So you certainly got to have that accounted for.

 

Tony Mauro: Yeah, you do. And it seems like as I'm looking through the list here, nothing's good, but we'll talk about anyway, because I think it's important to people understand some of these potential things that could become quite catastrophic and medical I would think would be one of them. Obviously as you retire generally your medical costs are going to go up. People are living a long time today where they're keeping us alive. And even my own father, his medical costs are up, he takes a lot of pills and things and I still think he's fairly healthy at 81. And so his costs are up. And so that eats again into his disposable income or his monthly income coming in. And again, just pile that on with everything else we just talked about, which we've got more here. It's something that you got to start thinking about because, and that's not even including some of the people that are in poor health and whether it's hereditary or something else, it adds up quickly.

 

Speaker 1: Well, and then of course number four is the possibility of tax increases. So just like inflation or whatever, we want to be able to try to retire in any environment, because we just never know what's, again, if you live 20 years or 30 years in retirement, you're going to see multiple administrations, which means you may see multiple tax code changes and we all know we're broke, the country's broke and we're spending money like it's water. So the likelihood of tax, even if they do nothing, Tony, the taxes are going up '26. So if you're not addressing future tax increases with your financial strategy, you are leaving an incomplete plan on the table.

 

Tony Mauro: And I do think it'll be interesting, we're still a few years away from '26, but unlike you, if somebody's just going to ask me, I think that they'll let a lot of these things expire and taxes will be going up in some form or another. And like you say it and as the time we're taping this, they just have been fighting over and delayed till June or, I don't know if they delayed it, I can't remember on the debt ceiling, but I think it comes due again in June or something. And some people want to keep borrowing, some want to cut. Obviously we spend more as a country than we're taking in. And I think we've talked about it a little bit before, the politicians never want to talk about, hey, it's like any other business. We don't take in enough to pay our bills. We either need to stop spending, or we need to increase our cost, or tax us more. So I can't imagine them going down anymore, but I'm usually wrong whenever I say that, I got to think they're going up in the future. And like you say as retirees, or in the rest of us, it's going to hurt you, because again, there's another little piece coming off before you get to spend anything.

 

Speaker 1: Yep, absolutely. More than likely it's going to be the case probably for quite a while. So we may not see rates this low again for a very long time. So you want to take advantage of it, which leads into number five, because you may want to take advantage of the tax rates now because there are challenges that present themselves with RMDs. Obviously we've talked a little bit about the SECURE Act. We're going to do a bigger, more in depth one later on, but they've pushed the age back again, so now it's 73 for those of born before '59, those born after '59, it's going to be 75. But a lot of people are in good shape and they don't want to take these Tony, they're like, "Well, I don't want to have to take money out." But they require it to require minimum distribution, so maybe taking advantage of the tax rates and doing Roth conversions, which is why that's been a very popular conversation piece for the last two years.

 

Tony Mauro: It really has. And we're talking about that more and more with people that do have sizable amounts is going a little bit against the grain and saying, well, even though you don't have to do it until 73 or 5 now, maybe we want to, at least filling up the tax bracket you're in, so that you can pay it at a lower rate, because that way it's now already been taxed and we can figure out something else to do with it. But if taxes go up and then all of a sudden you got to start taking money out, well again, that that's less in your pocket. And I think that's a mistake if you just blindly say, well, I'm going to wait because I don't want to do it right now and pay taxes. Sometimes it's actually better to pay a little than more later.

 

Speaker 1: And the likelihood, number six, that we're going to have a long-term care event just continues to grow. Two out of every three people, seven out of every 10 are going to have some event. It doesn't mean a nursing home, Tony, but it certainly means some sort of an event. It could be a short-lived event, it could be a longer event. It could be someone just coming out to your house for a few weeks. But either way, you may have to look at some sort of coverage on that. And it is expensive. People start looking at different alternative life insurance policies or different kinds of ways to possibly fund this.

 

Tony Mauro: And this could be a whole topic in and of itself as many of these could. But I would say just off the cuff, the best way to do it is try to protect, depending on where you're at of the income spectrum, with some sort of insurance while you're young enough where it's still relatively affordable. If you're waiting until 70, 75, if you can even get longer term care types of insurance, it's going to be extremely expensive. But a lot of people buy it when they're young and a lot of people now are using it to stay out of the home, the nursing home that is, is assisted living, people coming into your house and at least providing some benefits there where they can at least age in place and hopefully stay there. But yeah, if you don't have this accounted for and you have to go in, even if you're coming out and we're not talking nursing home here, but just for some care, it's like the medical costs, extremely expensive to do. And a lot of times Medicare doesn't cover a lot of this, so they're going to be looking for other insurance policies or your pocket.

 

Speaker 1: Absolutely. So you got to have all these pieces in there to get that financial plan in a complete status versus having some of these little pockets or holes that can certainly derail things. And Tony, we were talking a little bit about inflation and we were talking about economic times that we're in right now, this is March's episode of '23. There's still a lot of conversation about tons of tech companies, Walmart, a lot of places have laid off, Amazon, I guess that's retail and or tech. They've let a lot of people go already in the first quarter of this year. So the possibility of a job loss and what it could do to your retirement plans, especially if you're a couple of years away, let's say you've got five years or left and you think, "Okay, hey, as long as I can hang on to this job for the next five years, we're [inaudible 00:13:41]. But you never know, something could happen.

 

Tony Mauro: Yeah, it could. I'm in agreement. The people listening to this from around here will know what I'm talking about. But we have a huge Wells Fargo presence here in Des Moines and I don't know, 18, 20,000 people here total. And they've always been downtown. Well, they just came out and said, "We're moving everybody out to the western suburb campus and we're getting rid of these buildings," but they are laying off a lot of people. And of course, it's like 4 or 500, which doesn't sound like that many if you're talking about these giant companies. But here in Des Moines it's anywhere, it's a lot of people that, like you say, if some of these people were five, eight years from retirement, then thinking they were going to have this, well, it's like, "Okay, now what do I do?" Yeah, 55 60, nobody wants to hire me and I don't have an income. Maybe my skillset newer employers want. And that poses a real, at least, concern. Best way to combat it is obviously keep your skillset up, assuming you still want to work and stay nimble enough where you know can get out and get something else, but I don't think it's easy. The other way to do it too is have the emergency fund. We talk a lot about in planning of three to six months, or maybe even a little more to help you decide, get you through paying the bills until you can at least find something. But...

 

Speaker 1: Definitely got to have that, you got to have that emergency fund in place. Hopefully, if nothing else, COVID maybe taught, hopefully, many folks that it was going to be important to have some emergency funds sitting there if they unexpectedly lost a job for 2, 3, 4 months. So definitely-

 

Tony Mauro: I got-

 

Speaker 1: Go ahead.

 

Tony Mauro: Sorry for the interruption, but I was going to say the other thing too, how many of us out there, probably a lot of people can resonate. I been on my own for so long, I've forgotten what it was like, but gone are the days that people go to work and can feel like, "Well, if I work hard here, I'm going to be here for 50 years and I'm going to ride off into the sunset," because a lot of times it's companies, they just say, "Well, you know what, we're all about the bottom dollar and well, we're going to cut that department, or we're going to consolidate and do this." It doesn't seem like people have that safety anymore that they used to, and-

 

Speaker 1: It's definitely more rare. Pensions have been dying since the early '00s, late '90s, early '00s. And I think longevity in corporations, 30 and 40 year jobs have been taking that kind of hit for the last 20 plus years as well. And it's a big jobs market or it has been. Emerging markets and industry and all different kinds of things, but we also like usual, we oversaturate in some areas, other areas get to suffer and then they start to balance out. But it's certainly something to think about. And I think one thing I tell people all the time is, if you're really worried about something and you have any mechanical inclination skills, we sorely are going to be in source or shape for electricians, and carpenters, and plumbers, and things. It may not be the sexiest sounding thing, but I tell young people all the time, "Hey, if you don't think college is right for you, pay attention to in that industry sector, because a good contractor's worth their weight in gold."

 

Tony Mauro: We have a lot of commercials airing right now. I know we're getting off the subject, but if you can come and work hard, I think it was for heating and air conditioning. You become a journeyman, you can make a good living, a real good living, and you're always going to be in demand. But I think that, yeah, you're right, here, these industries are suffering. They can't find people that want to go do it. Everybody gets-

 

Speaker 1: They don't want to get their hands dirty. There's a young gentleman here in my area, he's been doing concrete for about seven years and he's only like 27 years old and he is just killing it. He's just making money hand over fist, because he does a great job, he and his, team and they show up and they get the work done and he's like, "Yeah, I don't have student loan debt and I don't have all that stuff." As a matter of fact, he's living in a half a million-dollar house and he's 27 years old while his best friend has got $300,000 in school debt.

 

Tony Mauro: Yeah, I've always said there's a ton of different ways to make money, make a living. And if you're good at business, if you're good at that kind of stuff, and you can run a good business, you can make as much as, or probably more and have a different type and a great lifestyle than somebody works for corporate.

 

Speaker 1: But entrepreneurship is not for everybody.

 

Tony Mauro: Not for everybody.

 

Speaker 1: You got to know who you are. You got to certainly know who you. And that goes a long way towards a good complete financial plan, whether it's a financial strategy while you're still working or in retirement, knowing who you are and being honest about some of those things can certainly help you and your advisor plan accordingly. We got a little sidetracked, but I think it still brings back in the nature of the beast of just money and how we take care of ourselves and how we strategize for the future, so. Last one, we'll just do it real quick and just that's passing assets as smoothly as possible to future generations. That's really just being tax smart, tax efficient with whatever you've got. So if you're wanting to leave that 401(k) behind to your kids, well the Stretch IRA removal from the first SECURE Act may say that you need to change that strategy a little bit. Things like that.

 

Tony Mauro: And that area alone should be enough where you should be talking to your advisor, especially if you know want things to happen a certain way. And on top of that, you got taxation and some other things. So to go about that blindly, I think you're really, to make it short, going to be in for real surprise depending on how you do it. So please go out and get some advice on, well on all these, but that one for sure.

 

Speaker 1: Yeah, tax efficiency in retirement. Some people say, "Well, I'm going to leave my," joke and say, "I'm going to leave my kids a tax bill," or "I'm going to leave them a credit card statement," or something like that. But I think at the end of the day, we all truly just want to, if we're going to leave a legacy, we want to leave it as efficient as we can, because God willing, we lived a long life and by the time we're leaving something to our children, they might be grown adults in their prime earning years. They might be in their 40s or even 50s in their earning years. And so you don't want to hit them with putting them in a higher tax bracket if you can avoid it. So again, efficiency is the name of the game, strategy is the name of the game. So if you want that complete financial plan, make sure that you're checking off some of these items on today's list. And if you need help, as always, stop by Tony's website, get in touch with he and the team at Tax Dr. Inc. You can find them online at yourplanningpros.com. That is yourplanningpros.com. Don't forget to subscribe to the show on Apple, or Google, or Spotify, whatever podcasting platform app you like to use, you can find our show there, Plan with the Tax Man, and that just lets you catch future episodes as well as check out some past ones. Tony's been helping folks for 27 plus years, great resource. He's a CPA, CFP and an EA, so certainly got a lot of good skillset there to help you out. Tony, thanks my friend. As always, I appreciate you. I hope you have a lovely start to March and good luck with those taxes, bud.

 

Tony Mauro: All right, we'll talk to you next time.

 

Speaker 1: Yep. We'll see you in late March here on Plan with the Tax Man with Tony Mauro.

 

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