Retirement Answers

Hello, and welcome back to another episode of Retirement Answers. My name is Jacob Duke, and I am a certified financial planner. And in today's show, we're going to be talking about the three questions that I am getting asked by my clients right now. So let's go ahead and get started. The first question that I am getting asked by most of my clients right now is in regards to the Secure Act two point o that was actually enacted right at the end of twenty twenty two and became effective in part in 2023.

And there are so many things to cover in Secure Act 2.0. It covers many different topics and a broad range of different things. I'm not going to dig into all the details of that right here today. In fact, I'll do a completely separate show on that where we dig into the details of that, and you can learn more about it then. But the question I'm getting right now for most of my clients is, is there anything in Secure Act two point o that I need to know about or worry about?

And, there's a few major points that affect you as a retiree. And if we look back at the original Secure Act, which was passed in 2020, a few major changes were made there. Number one, RMDs were set to begin at 72 where previously, they were set to begin at 70 and a half. So in 2020, that changed from 70 and a half to 72. Also, the original secure act, did away with the stretch IRA.

So what was a stretch IRA? Well, basically, if you passed away and you gave your IRA to your, 30 year old son, then he would be able to stretch out those distributions over his life expectancy, which ultimately lowered the annual required distribution from that IRA account that he inherited and therefore lowered his tax burden each year. Well, the Secure Act eliminated that and said, hey, In that situation, that son, he now has to begin taking those distributions over a ten year period, which basically condensed down those distribution years and said, you can't take it out over your life expectancy. Now you have to take out all of this money over a ten year period in equal payments. So that's what we call the death of the stretch.

And then also in, the secure act, it's one of the smaller points, but it was somewhat impactful. And basically, it said that there's no age limit on IRA contributions. Previously, before the SECURE Act of 2020, if you whenever you reached RMD age, you were no longer eligible to put money into an IRA even if you were working and making an and earning an income. That changed, and so the only rule for IRA contributions after Secure Act in 2020 was that you just simply had to have an income to contribute to an IRA. Okay.

So that brings us to the Secure Act two point o. So why are they making changes three years later after they already made a bunch of big changes originally on the SECURE Act. Well, now they're pushing back the RMD age yet again. So we jumped from 70.5 to 72 in 2020. And now in 2023, beginning in 2023, the RMD age is gonna begin at 73 rather than 72.

Now the RMD age for this Secure Act two point o and kinda everything included is somewhat confusing because there's different levels to it. And so here, I'm gonna run through a little bit of detail on that, and then I'll really wrap it up and say, here's actually what you need to know. We'll go through the confusing part of it, and then we'll come back and say, here's the clear, easy thing to understand. So here's what you need to know. If you are turning 73 in 2023 up until 2032, then you are going to begin taking your RMDs at age 73.

Okay? And and then if you are turning 73 in 2033 or later, your RMD age is now 75. Okay. So that's really confusing. A lot of numbers.

There's actually an error on this bill. They're gonna, I'm sure correct that here in some new legislation and kind of update that, but it's just confusing. Why make it harder than it already is? I think that's just commonplace for the IRS or the government in general is, hey, as things progress, we just want to make them more confusing and that's not good for anybody. So what you need to know is this.

If you were born 1950 or earlier, if your birth year was 1950 or earlier, then your RMDs would begin at age 72 or 70.5. Okay? So the secure act two point o beginning in 2023 actually does not affect you because you have already begun taking your RMDs in either 2022 or before. So if you were born in 1950 or earlier, disregard all of this. If you were born in 1951 to 1959, then your RMDs will begin at age 73.

If you were born 1960 or later, then your RMD age will be at 75. So those are the main things you need to know. It is the language that obviously is presented in the bill, is super confusing. So that little age chart just kind of like, hey. Know when you were born, and then based on that, you can know when your RMDs will begin.

So once again, if you were born from 1951 to 1959, your RMDs will begin age 73. If you were born 1960 or later, then your RMDs will begin at age 75. Obviously, this is all subject to change, as it likely will at some point in the future. But that for now, that's how it works. So whenever we hear that the RMDH is actually being pushed back a little bit, we're probably happy about that.

Right? That means we don't have to start taking those distributions earlier than we otherwise would want to. They're not forcing us to do so earlier. They're actually pushing that back, which is helpful. On the front end, whenever we initially look at it, it is helpful because you don't have to take money out.

Now there is a catch, right? Because what happens is, is whenever you do begin taking your RMDs, let's say you're going to be one of the people that starts taking them at 75. Well, what happens is, is the RMDs are still based on your life expectancy. And so whenever you do that, you're condensing down the number of years in which you're actually going to be taking those RMDs. So if originally you were taking them three years ago, you would have started at age 70.5.

And now you're to be starting at age 75. That's a five year difference, that you're actually delaying those RMDs, but your life expectancy is likely not growing by five years, you know? So what happens is you're condensing down the number of years you have to distribute all of your IRA money. Therefore, you're going to be making larger distributions each year once RMDs do begin. And that's going to be an issue because I talk about it all the time.

We've got tax issues with retirees that we have to accommodate and plan for, and RMDs are a big issue for most people. Now pushing that age back is helpful in some ways, and then it's also harmful in the ways I just described in the fact that you are going to be taking larger distributions than you otherwise would want to. And now you get to take those at a later date, but you're gonna be like I said, you're gonna be taking those in a condensed number of years. Therefore, your taxable income is gonna be higher in the years in which you are taking RMDs because the distributions will be larger because you have a less number of years to spread those out. It's somewhat similar, but not to the extent of the ten year rule, that was implemented for non spouse beneficiaries of IRAs right back on the secure act one point o.

So it's similar to that, but not quite to that extent. So that's just something to keep in mind whenever you continue to think about and plan for your retirement income and things like that, and just tax planning in general. We need to make sure that we still have a plan that's in place for your RMDs and just your tax plan throughout your retirement. And perhaps some things from a tax standpoint might not change for you. You still might need to be doing, your Roth conversions.

You still might need to delay your social security. You still might need to take money in distributions from your Roth IRA for large purchases. All those things actually still might apply, even though the rule is changed just a little bit. So, don't abandon your plan simply because your RMD age is, delayed just a little bit. You actually might need to speed things up.

So, just something to consider there. So that was the first question. Is the Secure Act two point o gonna affect me as a retiree? And that's the main thing is that R and D ages are pushed back a little bit. And like I said, we will actually dive into the the Secure Act two point o on another episode and dedicate a full show to that and really dig into the rules and things that were changed there.

Alright. So question number two that I'm getting from most of my clients right now is should I be making changes to my investment portfolio? And this is a great question. It's definitely one that I expect to receive during times like these, but my answer is probably gonna be not fun or maybe not what you wanna hear, but it is gonna be this. Likely, you should not be making any changes to your your overall investment portfolio.

The reason why is I'm a fan of not being reactive to current market events or current economies or different things like that. My my philosophy is overarching and kind of spans a long term view on on investing in the fact that if we've got a plan in place, we've implemented that plan. If we did it correctly from the beginning, then it should be able to withstand and weather the current moments that we're going through, whether they're good or whether they're bad. And that's the thing that I want to encourage people to do is say, Hey, if you developed a plan with your advisor or on your own, either that plan was good or it was bad, and you need to be able to stick to it no matter the current circumstances or situation that we're going through. So the first thing I would say is if you have a plan, stick to it.

Like the current market events should not be changing your outlook on how you invest and why you invest that way. Something that I like to abide by is that I only want to make changes to my overall investment portfolio or mix or anything like that is whenever my personal life circumstances change. You know? Let's say you have a health issue that comes up, or let's say that you bought a new house, or let's say that you liquidated some different rental properties or any sort of personal life change like that. Those are the times where we might adjust different, investment outlooks in the way that we allocate your your money because those circumstances dictate how much money you'll need, you know, to live on or other things like that.

And that is the thing that I would say, Hey, if we need to have more cash on hand, because you're expecting to need more cash, whether it be for a medical bills or a purchase that you're going to have, or just the fact that, you know, things cost more now and you just need more money on a monthly basis. Perfect. We can adjust for that. What I don't like to make adjustments based on is whenever the market goes up or when it goes down. And so that is the thing that's a big red flag for me.

That is something that I always like to be leery of and do not like to overreact whenever things are not going well. And and going on, you know, with that point is, you know, if you said, hey. I want to get out of the stock market and buy bonds, cash, and CDs. Well, that's perfect and great. Maybe, you know, interest rates are a little bit higher now, so perhaps you can get some return out of that money.

But what you're doing is if you're selling stocks to buy a CD at four and a half percent is you're selling your stocks and your mutual funds and ETFs at a 20% discount in order to get 4%, you know, over the next year. Well, what happens if the market goes up 10 or 12? Well, you did not participate in that. Therefore, you actually lost the money that you had before. You lost that permanently because you sold whenever it was down.

And so that's the one thing I advocate against. I would say if you are down in terms of your investments, then you kinda have to hold on to them so that, if slash when the market does recover, you're participating in that recovery. And in fact, one of the best things you can do in this kind of moment is not stop investing, but start investing more. You know, if you're buying something at a 20% discount and if we assume that markets are efficient and we know that over time markets go up into the right, they have obviously downturns along the way, but up into the right is the general consensus, Then at some point, we're gonna make our money back. And then with that being said, if we're buying at a 20% discount, I wanna buy more.

You know? I'm never I'm not gonna find, these cheap prices perhaps ever again. And so my philosophy is if you have cash, now's the time to deploy it. Now's the time to actually put it into motion, get it working for you, and say, hey. I'm gonna take advantage of this opportunity and not look at it as a problem.

Look at it more as an opportunity. So, that's that would be my encouragement for you is, you know, if you have a plan, stick to it, assuming it's a good plan. Number two, you can't see the future, so we have no idea what future returns look like. I only like to make changes to my plan if there are personal circumstances in your life that are changing. I would always be proactive rather than reactive.

And if you have any cash laying around, I would absolutely think about deploying that, taking advantage of the opportunity in front of you, and, investing it now. But but it's a great question. You know? It's it's what's on everybody's mind, and so I hope that creates some clarity and direction for you. Alright.

Next question. And, man, is this a good one? Should I retire in 2023 with the economy and markets being the way that they are? Wow. What a good one because this is one that a lot of people are gonna have.

A lot of folks were planning on retiring in 2022 and 2023, and they see the current market and they're like, wow, I just don't know if I can do it right now. You know, my my assets are down 20% or 15%. The economy's not doing well. Things cost a lot of money. Inflation's rising, all that stuff.

And, and that's just top of mind for most people that are thinking about retirement. And my answer to that question is yes, you should retire. And there's a big if that's attached to it. The if is, you know, if you could retire back in 2021 when things were awesome, you know, markets were at all time highs, your accounts were probably at all time highs, things are going well in terms of markets and investments, although the economy wasn't necessarily doing well then. If you could retire then, then you should be able to retire today.

Right? Because if you could re if you could retire then, that means either you had enough money or you had a good plan. And if you if you're saying that you could retire then, but you can't today, then then one of two things is possible. Either you just simply did not have enough assets saved, you didn't have enough retirement money saved and built up, or you just simply didn't have a good plan. And the the reason I can say that is because if a 20% downturn in the stock market destroys your retirement plan, then then you simply just can't retire.

It's just 20% downturns are part of the game. That's just what happens every four years at you know, on average. It just happens. It's the way it goes. And so, with that said, if you could retire then and you can't today, either you didn't have enough money or you simply just didn't have a good enough plan.

And I would be super, I guess, cautious if that's how you're approaching it. You know? One of those two things has to be true if that's your mindset. You know? I could retire them, but now I can't because the market's bad.

It doesn't work that way because here's the reality. You're gonna go through plenty of these ups and these downs throughout the next twenty, thirty years of your retirement. And so in general, you have to have a plan that's solid, that can withstand all market events, all market situations because there will be cycles where things are down and you don't feel very good about them. And there will be times where things are great and you're like, man, this retirement thing is super easy. So all that to say, if a 20% downturn blows up your retirement plan and will determine your retirement success, then either you just didn't have the assets to retire in the first place or you just need a better plan.

One of those two things. If you have an income plan built out, you should be able to weather these types of moments. No problem. Obviously, it may raise your concerns or worry just a little bit, but having that plan, you know, knowing understanding why you're invested the way you are, understanding where your income is gonna come from on a monthly basis, and understand how we're how we can weather that storm, that type of plan is what you need. And so what I do with my clients is I build out a three bucket retirement plan from an income standpoint.

And I say, hey. We need x amount of money in cash. We need x amount of money in bonds and treasuries and CDs. We need x amount of money in stocks for our long term, you know, outlook and growth. And so whenever we have something like that set up, we've got at least five years of retirement income ready to go.

And that what that does is that provides you peace of mind knowing that, hey. The market's down 20%, but I don't need any of that money that's actually down 20%. I don't need that for at least five years from now, if not longer. Because the the purpose of that particular bucket of your money is to be your long term growth asset. Because the reality is inflation is not gonna go anywhere.

Things are always gonna cost more. You could live for thirty, forty years. Who knows? We have to have assets that can allow us to live that long and then also continue to provide for our needs as things continue to cost more. And so we have to have some sort of aggressive bucket within your overall retirement plan.

And so whenever we've got all these things and we combine that all together and say, here is how much money we need each year. Here's how we're gonna allocate our funds to meet those needs. That way we can weather the short term storms and then also not give up the need for long term growth. And so to answer your question, should I retire in 2023? Yes.

Absolutely retire. If if the numbers make sense, absolutely do it. You know, temporary market decline should not be the thing that sways you one way or another. You know? I would say do it.

You know? Go enjoy your family. Go enjoy the lake. Do do the things you wanna do. Go travel.

Like, that's what life is about. And so, just have a good plan in place. Make sure everything makes sense from a math standpoint and work with a good adviser to help you get there. But, yes, I I say retire. Make make it happen.

So I hope that's helpful, and I really appreciate you tuning in to today's show. Those are the three biggest questions that my clients are asking me right now, and I'm assuming a lot of you probably have those same questions. So I hope those answers were helpful. I appreciate you tuning in to this episode of Retirement Answers, and I look forward to speaking with you again here soon. Hope you have a great week.