5 Game Changing Strategies for Retirement

Welcome back to We're Talking Money Short Takes. Phil, today we're going to talk about five game-changing retirement strategies. These are tremendous. When we talk about retirement, it's likely one of our largest financial goals of our entire life. We're talking about 30, 40 years potentially of you living off of your income, of your investments, and it can be daunting, can be overwhelming.

But Phil, starters off, number one right out of the gate: you got to build a budget. But so many people say, well, I don't really want to live on a budget. I know what I earn, I know what I want to spend, and I save a little bit. They just view that as a bad word. Couple things I'd like to go over in the budget.

Do we have anything on our budget today? No, I don't think so. But it's not, it means you have to be disciplined. You can't spend everything and expect to be prepared for retirement. It's hard for a 35 year old to say, yeah, I'm preparing for something that's not going to happen for 30 years. But when you get there, you're not going to want to give up what you had. You're not going to want to give up that lifestyle, right? So you got to have this budget.

And you refer to that as a starting block. It's really the beginning of the process. Without it, you really can't plan.

Second one, preparing for a downturn. What about that one? We know that the downturns are going to happen. One out of every three years we see a correction in the market at least once. And so what a correction is, it's the market dropping by more than 10 percent. Just know that you need to prepare for that when you're getting ready for retirement, when you're talking about retirement income. And one of the easiest and best ways to do that is to set cash aside. If the market's down for a year, well, what does it matter? We have two, three, four years of cash sitting there and you're going to be just fine.

When you're trying to go to cash, you are required to make two very important decisions. The first one is when do you go to cash. And what we know is that when you're sitting in cash, markets don't wait on you to get back in before they start rebounding, and they can rebound quickly. The second decision, less likely for you to get this one right, is when do you go back into the market.

And what most people do, the average investor, they will get out because, what, the market fell. And so everybody says, oh my goodness, now we're down 20, 25. Well, that's the wrong time to sell. That's the first major decision. Then while you're feeling all depressed and you sell out, then you say, okay, now things look like they're getting better. But now the market has rallied over weeks or months. You probably sold at the bottom and now you're going to buy in when it's at the top. Horrible move.

Number three, the right type of investments. What are they? If you're in the right types of investment, then you have the opportunity to create income by way of things like dividends, maybe interest, and that's what we need in retirement, so that your monthly obligations are paid. Then you don't have to worry about selling equities or stocks, which could erode principle. Instead, you stay invested. You can live with volatility. It's natural when it comes to investing, it's part of it, yet you still have sustainable income.

So I have a couple questions. One, so what type of equities are those that you're talking about that are generating that income? And then my second part of the question was, what are some cash flow returns, or what are some returns that you feel like you can peel off, average, with stocks that paid dividends?

So let's talk about that first. So dividends might range three to four percent. Then you can generate another, say, half percent with interest in this environment. And then lastly would be things like covered calls that we use on equities that we own. So those same equities paying you a dividend, we can sell an option on those, bring in more income. That might generate another two to three percent. All told, you could have five to seven percent cash flow of income.

Number four, managing taxes appropriately, including tax loss harvesting. So I'll let you talk about tax loss harvesting here in a second, but taxes are by far one of the biggest factors to consider in retirement. We don't want to just have one bucket of money that's a huge 401k or an IRA, and every single dollar we have to pull out, we have to pay ordinary income tax on it.

Let's talk about that tax loss harvesting for a minute. I'm going to give it to you in simple terms. You need two accounts. You got a Roth, or rather your traditional IRA or your 401k, so qualified money. When you take that money out, it's going to be taxed. If you have another account, another investment account with non-qualified money, so these are dollars you can get to anytime you want, if we have positions in that account that are going down, for example, maybe they've got some losses, we can extract that loss. We can sell that security and we sit it to the side. Now it's in the books and we can pull that out and use it whenever we need to.

So the next game-changing strategy is making sure you're taking full advantage of charitable and estate planning techniques. So the first one that we talk about is what we call a qualified charitable distribution, or QCD. Essentially, the law states that if you have money in an IRA, you can take up to a hundred thousand dollars a year from your IRA and donate it directly to the charity. And if you donate it from the IRA directly to charity, you get the tax deduction.

Charitable remainder trust. This one is really for people that have a lot of built-up gain, so capital gains we're talking about here. So if you've got property, family land, farms, you probably have been reluctant to sell those assets because you don't want to pay all the tax. Charitable remainder trust, if two things exist here: one, you have a lot of built-up capital gains, and you have a penchant for charitable planning, so you want to give to a charity, this might be the tool for you.

So you take those assets before you sell them, you put them into this charitable remainder trust. The trust sells the asset. Now we've got all that money, we can invest it to generate income, and for the next 20 years we take income, or we set it up to give income to our kids or whoever we want to give the income to. Then using calculations that we're required to use, something that gets us to what's called the remainder rule, then as long as there's enough left in that trust at the end, that money then goes to the charity tax-free. The capital gains were removed. You never had to pay those capital gains, and you benefited whoever you left the income to for those 15 or 20 years or whatever you chose.

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