4 Retirement Numbers Savers Should Know
by SGL Financial
Our 2 Cents – Episode #124
4 Retirement Numbers Savers Should Know
Welcome to the first episode of the Our 2 Cents podcast for 2023! We’re excited to kick off our show with some exciting new topics.
First, we’re sharing four numbers to keep in mind as you plan ahead for the new year. Then we’re looking at what retiring with $1 million could look like, and we round out the show with a couple listener questions.
- 4 Retirement Numbers Savers Should Know:
- What 25% represents…
- What happened in the year 1931…
- What you can do with $22,500…
- What 41.7 is the average of…
- 24.5 Million Millionaires:
- With the cost of living increasing, $1 million is not what it once was.
- Why people are surprised by what 4% of $1 million is in retirement.
- Is $3 million the new $1 million?
- Listener Questions:
- “I turn 72 this year, so I’ll have to start taking money out of my IRA, even though I don’t really need it. Can I just take it out and reinvest it right back into something else?” – Ellen
- “Should I be doing anything besides 529 plans to save for my kids for college or is that still the best option?” – Matt
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847.499.3330
Podcast Transcript
Announcer: You are listening to Our 2 Cents with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the President of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Good morning and Happy New Year.
Steve Lewit: Happy New Year everybody.
Gabriel Lewit: This is Gabriel and Steve, and we are welcoming you back to our first 2023 edition of Our 2 Cents.
Steve Lewit: It’s so exciting to start a new year.
Gabriel Lewit: It is, and I don’t even recall, Katelyn, maybe you know off the top of your head, producer Katie, what episode are we on here? Maybe you can pull… Hold on. She’s going to look it up real quick. And we’ve got a new year here for you. A range of new things to talk about.
Steve Lewit: Yep.
Gabriel Lewit: Maybe.
Steve Lewit: Yep. Yep.
Gabriel Lewit: As new things come along.
Steve Lewit: Yep.
Gabriel Lewit: We actually talked about some new things on the last show, but yeah, hold on. She’s still looking it up here. I think you can go to our website, right? It’ll tell you on there.
Steve Lewit: She’s logging. Give her a chance.
Gabriel Lewit: Oh.
Steve Lewit: She’s logging in.
Gabriel Lewit: 124.
Steve Lewit: 124, we’ve done this 124 times.
Gabriel Lewit: We have shot the breeze 124 times.
Steve Lewit: And we’re still talking to each other.
Gabriel Lewit: We are still looking and working with one another here in the studio.
Steve Lewit: Certainly amazing.
Gabriel Lewit: Yeah, it’s been a good time.
Steve Lewit: Yep.
Gabriel Lewit: So, we’ve got a great show lined up for you. Thanks for coming back and joining us here again for the new year. And of course with the new year ticking over here. Dad, what do you got planned ahead for the year? Anything I would say interesting or exciting that you’d want to share?
Steve Lewit: Well, I’ve been writing a book for now-
Gabriel Lewit: 10 years.
Steve Lewit: Seven years. Well, books take a long time. If it’s a good book, I know authors that have taken 10, 12 years to write a book. Novels take a long time. So this is about 60,000 words. So seven years actually isn’t that long. This year I will finish my book.
Gabriel Lewit: How much are you going to put down on that?
Steve Lewit: How much do you have in your pocket?
Gabriel Lewit: I have $0 in my pocket.
Steve Lewit: It’s a bet.
Gabriel Lewit: I have a credit card in my pocket.
Steve Lewit: I’ll take your credit card for the day.
Gabriel Lewit: Oh, I don’t know about that.
Steve Lewit: Yeah.
Gabriel Lewit: How about a hundred bucks?
Steve Lewit: A hundred bucks?
Gabriel Lewit: You heard it here.
Steve Lewit: Okay. You heard it here.
Gabriel Lewit: Folks, we’re shaking hands on this bet.
Steve Lewit: I publish by September, October.
Gabriel Lewit: Get your money ready.
Steve Lewit: And folks, get your excitement and enthusiasm ready. Although, I am not sure this is a book for everybody.
Gabriel Lewit: Yeah. Well I know you write some weird stuff, man.
Steve Lewit: It’s a weird book.
Gabriel Lewit: So yeah, it’s probably not for everybody.
Steve Lewit: Hey, look, I just-
Gabriel Lewit: Very spirituality based, what is it?
Steve Lewit: Philosophical.
Gabriel Lewit: Philosophical, yeah.
Steve Lewit: More philosophical. How to live life and-
Gabriel Lewit: Not a financial advisory book.
Steve Lewit: No, this is not-
Gabriel Lewit: To clarify.
Steve Lewit: … our planning book, which I’m still working on. But I spent eight days, 10 days in Ojai, California, first week in January.
Gabriel Lewit: I did know that, yes.
Steve Lewit: And folks, I want to tell you, I don’t want you to feel badly for me because I had a wonderful time, but I had eight out of 10 days of solid rain. I mean, it was raining buckets out there. And I think, Katie, you mentioned there’s a flood warning out there.
Gabriel Lewit: No, there’s been floods.
Steve Lewit: Oh, there’s been floods.
Gabriel Lewit: Not just flood warning. Yeah.
Steve Lewit: Yeah.
Gabriel Lewit: All over the state, I think.
Steve Lewit: But when I spend 10 days staring at the mountains, strange things happen in my head.
Gabriel Lewit: Let’s not go there.
Steve Lewit: So other part of that’s in the book.
Gabriel Lewit: Other than your… I don’t want to know. And other than your book, anything else planned for the year ahead? Goals, resolutions, the fun things that everyone likes to think about and then hopefully do.
Steve Lewit: No, no. I’ve got, yeah. I think my goal this year, Gabriel, is to have better time management, sleep better.
Gabriel Lewit: Sleep better.
Steve Lewit: Sleep better.
Gabriel Lewit: Cool.
Steve Lewit: Yeah, because I get up at-
Gabriel Lewit: How have you slept so far?
Steve Lewit: I’m doing great. Well, you know why? Because I’m getting to bed earlier.
Gabriel Lewit: That’s good.
Steve Lewit: Yeah.
Gabriel Lewit: Yeah.
Steve Lewit: I’m not staying up until 12 o’clock watching a show that I can’t… You get into a series and you always want to see what happens in the… So I always start the next series, the next session, and then it hooks me in. I say, well, I’ll just watch the end of this one and then I get hooked into the next one.
Gabriel Lewit: Well, I think they do that on purpose.
Steve Lewit: Of course.
Gabriel Lewit: Yeah, of course.
Steve Lewit: Of course. I succumb.
Gabriel Lewit: Oh, there you go. All right. Well folks, let’s go ahead and dive into our topics here for the show here today. So we’ve got some interesting tidbits and topics here. One was from an article titled Four Retirement Numbers That Savers Need to Know Heading Into 2023. Retumbers. That’s funny.
Steve Lewit: Yes.
Gabriel Lewit: That’s a retirement number, folks.
Steve Lewit: Retumber.
Gabriel Lewit: Is a retumber. Okay, so what are they? Okay, these are some fun little numbers just to kick things off here for the year. 25%, what is 25% representing? According to John Hancock, that is the number of retirement savers that said that their finances often caused them stress.
Steve Lewit: Yeah.
Gabriel Lewit: 25%.
Steve Lewit: Yeah. And I looked at that with a skew or scan. I looked at that-
Gabriel Lewit: With skepticism.
Steve Lewit: With skepticism, because I know that most people that we see, it depends on what you call stress. Stress is a big word. I’m stressed out over my money, but a lot of, most all the folks we talk to have some concern or worry or agitation, which is a kind of stress. So I think that number is much higher depending on how people interpret stress.
Gabriel Lewit: Certainly yeah. It could be, we don’t know all the options that were on the survey. But yeah, that’s still either way, if you’re stressed out there, there were a lot of reasons last year when you look at the market and the economy and inflation, there were many areas of concern for people last year. And in fact, what the second part of this number here is that it was up substantially from earlier in the year last year when markets were at a high. And then they redid the survey later in the year, and they had a substantially higher increase in the number of people that were stressed out.
Steve Lewit: So, it went from 18% to 25%. So that’s the 7% increase on 18%, which is about 40%. So that’s a big jump. Even if it’s higher, the ratio would probably be the same. So that is a pretty big jump. And as you said, last year was a tough year.
Gabriel Lewit: It was. And that’s going to bring us to our next number here, which was the year 1931. Okay.
Steve Lewit: I remember that year.
Gabriel Lewit: I don’t. I don’t think you did either.
Steve Lewit: I don’t, no.
Gabriel Lewit: I don’t think many of our listeners have either.
Steve Lewit: Well, I hope they do, some of them.
Gabriel Lewit: Well, so 1931 was the worst year of a 60/40 portfolio. 60/40 meaning 60% equities and 40% bonds, which is generally considered to be a very well-balanced retirement portfolio.
Steve Lewit: Traditional retirement conservative growth portfolio.
Gabriel Lewit: So, 1931 was considered to be the worst year for a 60/40 portfolio where it had lost about 36% of its value. So a lot of people felt last year was a very bad year for their 60/40. And it was, because of course bonds were down quite a bit last year due to rising interest rates. And it was a historically bad year for bonds and an unusually bad year for a 60/40 portfolio.
Steve Lewit: And we did, I mean, in our planning, when folks say we’re really conservative, we would buy a portfolio that has more bonds in it. That’s the way we would organize that portfolio. But unbeknownst to anybody, bonds which are supposed to go up in value when the stock market goes down in value, had their worst year in history.
Gabriel Lewit: Well, it was a combination effect. The market went down, but interest rates went up, which caused bond prices to go down. So both went down at the same time.
Steve Lewit: Yep.
Gabriel Lewit: Okay. So it’s pretty unusual to ever see that occur. Certainly not the great experience to have gone through. But what does it mean? Does it mean you make massive changes to your portfolio, ditch bonds forever, get out, time the market? No. Right? These are things that generally will harm you in the long run. In fact, there’s lots of data that says in the five years after a market downturn, 60/40 portfolios do very, very well.
Steve Lewit: Extremely well.
Gabriel Lewit: Yeah. In fact, the data point here from the article says that they, on average, have annualized returns of 13% in the five years after a market downturn.
Steve Lewit: Yeah. It’s the reaction to the market after the emotional impulse and say, I’m getting pretty wiped out here. You got a 401(k), and your 401(k) is your retirement savings, and that loses 20, 25% at the worst point, 26%. And it’s like, oh my gosh, how am I going to retire? What am I going to do? How am I going to save more money? And that’s where the stress comes from.
Gabriel Lewit: Yeah. So if you’re feeling stress, if you’re worried about the performance of your portfolio, it’s always good to talk about those things. And we are here to help guide you through those questions. And sometimes, the other thing to point out is all 60/40 portfolios are not built the same.
Steve Lewit: I’m glad you brought that up. That’s really important. Say more about that.
Gabriel Lewit: Well, a lot of times I might ask somebody how they’re invested, and they say, “well, I’m aggressive.” And then we get into what that means. And they might have all individual stocks, which is not just aggressive, it’s speculative, which is a much more dangerous form of aggressive investing.
Steve Lewit: Surely.
Gabriel Lewit: And just like somebody can say they have a 60/40, you might have a 60/40 with two funds in it, and you could have a 60/40 with 20 funds in it that’s a far more diversified portfolio that’s going to be far less risky than your two fund 60/40.
Steve Lewit: Yeah. So all 60/40s don’t mean conservative, it just means 60 equities, 40% bonds. If that 60% equities, to your point, Gabriel, is all tech stocks, you’ve got a pretty aggressive portfolio.
Gabriel Lewit: Yeah. Lots of different ways you can arrange your portfolio if you’re just looking at it from a broad asset class number, like a 60/40. So just something to keep in mind. I don’t want to get too far down that path there today. Our next number here is 22,500. That represents the contribution limit, the upped contribution limit to a 401K for 2023 up from 20,500. So it was an increase, a very surprisingly large increase of $2,000 that you can now additionally add into your 401k each year.
Steve Lewit: Yeah. I was surprised at that. I actually was surprised that they pushed the required minimum distributions back a year. So this year, if you’re 72, you do not have to take out a required, I think we have a question about that later, don’t we?
Gabriel Lewit: Yes, we do.
Steve Lewit: Okay. So I won’t say anything.
Gabriel Lewit: Don’t spoil the thunder.
Steve Lewit: I won’t spoil the thunder.
Gabriel Lewit: All right.
Steve Lewit: I already spoiled it.
Gabriel Lewit: You did spoil it, yeah.
Steve Lewit: I’m sorry.
Gabriel Lewit: Well, what does that mean? It just means, I know it might be tricky with inflation eating away and chipping away at your budget, but if you have additional dollars and you’re worried and stressed about your retirement, this gives you the opportunity to save more. And saving more of course is always a good thing and helps you in your retirement planning.
Steve Lewit: And folks, 401(k)s are the traditional way of saving. It’s very, very popular. Gabriel, I just want to point out also, as I always do, as we always do, there are other ways to save, but this is a terrific way of automating your savings. Just may have it come out of your paycheck and then it just grows because your dollar cost averaging into the market.
Gabriel Lewit: Yes, exactly. So always a good idea there. And then our number here, our fourth number here for this segment is 41.7, which if you didn’t know, is the average age of the American worker.
Steve Lewit: I’m pulling that average up. I just want you to know.
Gabriel Lewit: Well, I’m pulling it down.
Steve Lewit: You’re pulling it down.
Gabriel Lewit: So, we got to that average of 45.
Steve Lewit: So is Katie, Katie’s pulling it way down.
Gabriel Lewit: Now some of you might be higher than that number, some of you might be lower, but what does it mean if the average retirement age is 65? The average worker at 41.7 still has about 24 years that they can save and invest. And in investment world, 24 years can be a pretty long time.
Steve Lewit: It can be.
Gabriel Lewit: Okay.
Steve Lewit: Unfortunately, it goes pretty quick.
Gabriel Lewit: Yes, it certainly can. So what does that mean? It means you want to make sure that as you are assessing your plan, you look at your time horizons, you adjust your portfolio accordingly and making sure that everything is really well integrated as part of your retirement planning.
Steve Lewit: Yeah. So I had a client in the other day, Gabriel, I think 40 or 39, around 40 years old. And their question was to me, well, is it too early to start retirement planning? Which I thought a really interesting question. And the answer is no, absolutely not. In fact, the earlier you start, the better off you are. Gabriel, you and I were talking about how do you, like a child, you have a child 20 or 25 years old. If you want to help that child with retirement, there are ways of doing that, because that child, let’s say you have a child 20 years old and they’re going to retire at 65, well, they’ve got 45 years. There’s magic. There are products that over 45 years that will deliver huge amounts of income for a child at 65 years old that you can set up today for a modest amount of money. So it’s never too early to start retirement planning.
Gabriel Lewit: No, never. In fact, I mean that’s part of the new Secure Act, which we talked about on the last show. They’re going to automatically start adding a contribution for workers. They don’t have to opt in, they could opt out, but they’ll automatically add that in because everybody knows the sooner you start saving, there’s a power to it that only comes with time. And if we can take time and put it on our side, you’re going to be in much better shape.
Steve Lewit: Absolutely.
Gabriel Lewit: Yep.
Steve Lewit: Yep.
Gabriel Lewit: So those are just a couple of fun numbers for you to keep in mind as you think about your planning. And of course, if you’ve got questions there, if you are amongst those 25% or higher that are concerned about their, or even stressed about their finances, that’s the time to talk with a planner or with an advisor.
Steve Lewit: Or just want to double check.
Gabriel Lewit: Yeah.
Steve Lewit: Just I want to be sure.
Gabriel Lewit: Yeah, give us a call here, (847) 499-3330 or go to sglfinancial.com and we of course would love to have a time just to chat with you and see how we might be able to help. And with that, let’s talk a little bit about millionaires.
Steve Lewit: I love millionaires.
Gabriel Lewit: Well, why would we talk about millionaires?
Steve Lewit: Well, what’s interesting about that to me, because I’m a few years older than you are, Gabriel, but when I was your age, being a millionaire was an amazing thing. It’s like you’re a millionaire. That’s so amazing. And over the years it’s like they’re all over the place. So the article says there are, how many does it say there are? 21, 24.5 million millionaires in 2022. Which is a lot of millionaires.
Gabriel Lewit: It is a lot of millionaires. Yeah. 24.5 million millionaires.
Steve Lewit: Yeah.
Gabriel Lewit: Sorry, I thought I said it twice, well, I did say it twice. Anyways, what does that mean? Well, why are we talking about it? Because a million dollars isn’t what it used to be.
Steve Lewit: It’s not what it used to be. And the cost of living has gone up, and just having a million dollars may not cut the mustard.
Gabriel Lewit: Well, it’s interesting. I think things are tricky out there for people. I just had a client a meeting two days ago, now they’re a pretty well off couple that earns a good amount of income, about $250,000 a year combined. And they were looking to buy a new house, which was about, I think it was a $550,000 house. And they were saying, okay, here in Illinois with all the property taxes, insurance, higher interest rates, of course now on mortgages, they were saying that the mortgage that they would want for this home would be close to $5,000 per month.
And they were saying, they were asking me, what are other people paying? We feel like we make good money and we can’t afford to buy a house. And I think it’s across the board, people with a million dollars don’t feel like they have a million dollars or it just doesn’t go as far. People that make good income feel like they can’t afford to buy things. People that are making less than that are also struggling, feeling like they can’t afford to buy food at the grocery store or buy gas. So it’s a hard time just, I feel there’s a pervasive feeling across the board that people are feeling very, very tight with their money.
Steve Lewit: Very, very much so. Especially in light of rising prices going to the food store and all of a sudden you’re spending 30, 40% more than you would normally spend. And a lot of folks can’t afford that.
Gabriel Lewit: Well, it’s funny, I was at the grocery store the other day, and I shop in multiple stores. I try to find certain things at certain stores. So I buy certain things at Whole Foods, I buy certain things at Target, I buy certain things at Mariano’s, right by my house. But the other day I was at Whole Foods looking for some fruit, some pears in particular for my son. And they have good pears.
Steve Lewit: I’m not going to ask you why you shop around for pears.
Gabriel Lewit: Pears, you’ve got to find the right ones.
Steve Lewit: Wait. So you go to different stores to find pears?
Gabriel Lewit: No, I don’t go to different, I just always go to, I buy the pears from Whole Foods.
Steve Lewit: Isn’t he a good dad folks? He’s such a good dad.
Gabriel Lewit: Well, anyways, my point is, I was walking past, I was going to pick up a chicken for dinner, and I was walking past the milk section, and they have different brands of milk there. They have some of their normal brands and then they got some of the, I don’t know, fancy brands or whatever, but there was a gallon of milk that was over $10.
Steve Lewit: Yeah.
Gabriel Lewit: I was like, wait a second. What? I was like, I’m not buying that one.
Steve Lewit: Nope.
Gabriel Lewit: So, I forget what the normal regular organic brand that was still $6 for a gallon of milk. But it’s really crept up there, prices and inflation. And it can be a hard pill to swallow.
Steve Lewit: Yeah. So a million dollars, think of it this way, how much income can a million dollars give me? Well, the article points out, and appropriately, that if you use the old 4% rule on where you take 4% of your investments as income, and that’s called a safe money withdrawal rate, which we can argue about at some point in time, but I’m not a big believer of it. But if you did, 4% of a million dollars is 40 grand a year.
Now, if you got 40 grand a year and you pick up another, let’s say 35,000 in Social Security and you take off taxes, that becomes your budget. So if you are spending a hundred grand a year and you got a million dollars because you were making high income, but not saving, you got a million dollars, you’re not going to have that quality of lifestyle when you retire. So a million dollars at 4% a year is only $40,000 a year. So are there better ways of planning income than using that old time rule? And essentially, Gabriel, that’s what we do, is we have better ways of planning income than using that rule.
Gabriel Lewit: Well yeah, there are definitely other ways, other approaches. The 4% rule is one that’s commonly out there. But I like the quote from this article says, people are surprised when they do the math and realize 4% of 1 million is only 40,000. And certainly of course it is.
Steve Lewit: Well, it’s 40,000 less taxes if it’s coming out of an IRA. So now it’s 30,000.
Gabriel Lewit: Yep. And so $30,000 doesn’t really take you too far in retirement depending on what you’re typically used to spending or living on while you’re working. And so a million dollars used to be the target number. And basically what the gist of the article is it’s a higher number these days for a lot of people. Now, I still think if you’ve got husband, wife, and you both have good jobs, and you both have social security, good payments coming in, maybe you’ve got a million dollars and you don’t live too lavishly, you’ll be able to retire on a million dollars.
Steve Lewit: For sure.
Gabriel Lewit: But you’re not going to have oodles and oodles of extraneous money that you can go out and spend with that million dollars.
Steve Lewit: Not a lot of play money as we call it.
Gabriel Lewit: Right, because if you do use up the million-dollar base-
Steve Lewit: You’re done.
Gabriel Lewit: Guess what? You’re not earning interest on that anymore.
Steve Lewit: Well, all you have is your Social Security is left or a pension.
Gabriel Lewit: Yep.
Steve Lewit: Yeah.
Gabriel Lewit: So yeah, what does that mean? Well, as we plan out your retirement, as you said dad, there’s A, other ways of planning for income, but we also want to make sure that you feel like you’re going to have enough saved up. So you asked earlier, when’s too soon to start planning for retirement? I don’t think there is a too soon.
Steve Lewit: Yeah. And I think it’s really, folks need to be careful here. Gabriel, I remember the ads, I forgot what company it was, says, do you know your number?
Gabriel Lewit: I’m not sure. I do remember the ad, but I don’t remember who did it.
Steve Lewit: And you know what, it’s not only about the number, it’s about how that number is used. So there are different parts of this. Just saying, I’m going to have a million or 2 million dollars is not sufficient to plan your retirement, aim for a number there. It needs a plan behind it that says, okay, here’s my number, here’s how I’m going to get my income, here’s how I’m going to save my money. It’s a linkage of different things, not just know your number.
Gabriel Lewit: Well, I think the new 1 million is like 3 million.
Steve Lewit: 3 million. Yep.
Gabriel Lewit: Yeah. Is what I’ve seen with clients that I have that have 3 million dollars. They can spend pretty comfortably. They’ve got some excess surplus. They can do a lot more and not really think as much about it. But with a million dollars, you still have to plan fairly carefully.
Steve Lewit: Tighter. Tighter.
Gabriel Lewit: Yeah. A lot tighter.
Steve Lewit: Yep.
Gabriel Lewit: So yeah, so 3 million’s the new 1 million. And how do you get to that 3 million? Well, you got to continue to put your plan in place to get there. And that’s one of the things we can help guide you with.
Steve Lewit: Definitely. That’s what we do.
Gabriel Lewit: That’s what we do. All right. So we did have a listener question here that Mr. Lewit spoiled one of them in advance.
Steve Lewit: Well I-
Gabriel Lewit: Thank you very much, Mr. Lewit.
Steve Lewit: I’m the spoiler.
Gabriel Lewit: So yes, over the last week or two we’ve had just a couple questions pop in that we want to make sure we have the chance to answer here on the show. And let’s start with the one that you led into there a little bit earlier. Ellen, you emailed us and you said that you turned 72 this at the start of this year. And you’re wondering about how to take your RMD from your IRA this year and whether or not you should reinvest it. Well, I’m laughing a little bit because I have good news for you, Ellen.
Steve Lewit: Yes.
Gabriel Lewit: Which is, you don’t have to take it this year.
Steve Lewit: Good news, which she already had.
Gabriel Lewit: What’s that?
Steve Lewit: She already had the good news. I said that earlier.
Gabriel Lewit: I’m not tracking with you.
Steve Lewit: Oh, I said earlier, you don’t have to take it.
Gabriel Lewit: Yeah. So I’m just addressing Ellen.
Steve Lewit: You’re reiterating the good news.
Gabriel Lewit: Yes. Reiterating.
Steve Lewit: Yes.
Gabriel Lewit: Yes.
Steve Lewit: Yes.
Gabriel Lewit: So yeah, what does that mean? It means you just don’t do anything if you don’t need the RMD or the income this year, you just don’t take anything out.
Steve Lewit: You know what’s surprising, Gabriel? Already this year, I’ve got three phone calls on “Steve, we need to plan my RMDs this year I’m turning 72.”
Gabriel Lewit: So yes, if you haven’t, to be very explicit there, because there’s a lot buried in that secure 2.0 law that this is part of, yeah, you don’t have to take your RMD this year if you’re turning 72 this year.
Steve Lewit: Exactly, exactly.
Gabriel Lewit: Yeah. So Ellen, hopefully that helps answer your question. The second part there, well, let me just touch upon it. You mentioned, what should you do with it? Well, if you don’t need it, and you do have to take RMDs this year, let’s say you had to take it last year, then you’ll probably have to take it this year. That’s not an exception for you. You would just typically reinvest it.
Steve Lewit: Yes.
Gabriel Lewit: So, it’s as simple as just moving it to a new account after tax. In fact, I’ve done this for a handful of clients last year, and you just pay the taxes the following spring and you keep the money invested.
Steve Lewit: All right. So could you clarify what you just said? Well, if you took it last year, you have to take it this year.
Gabriel Lewit: Well, if you turned 72 last year, 2022, and you took your RMD, you’re going to be 73 this year anyways.
Steve Lewit: Right.
Gabriel Lewit: So, you’d have to take your RMD. So yeah, so if you were taking your RMD last year, you still have to take your RMD this year.
Steve Lewit: Right. Yeah.
Gabriel Lewit: But again, if you’re turning 72 this year, then you don’t have to.
Steve Lewit: Yeah, that does make sense. I was thinking of something else.
Gabriel Lewit: Yeah.
Steve Lewit: That does make sense. If I were 72 a year later, I would be 73.
Gabriel Lewit: You indeed would be.
Steve Lewit: Yeah, I would be.
Gabriel Lewit: Yes, you would.
Steve Lewit: Well, you started it.
Gabriel Lewit: That’s how simple math works. I’m just teasing.
Steve Lewit: Me, financial advisor.
Gabriel Lewit: Oh goodness. All right. Well we did have another question here from Matt. Matt, Happy New Year.
Steve Lewit: Happy New Year.
Gabriel Lewit: You asked, should I be doing anything besides 529 plans to say for my kids for college? Or is that still the best option for me?
Steve Lewit: Oh, I love that question.
Gabriel Lewit: You want to take point on that?
Steve Lewit: Well, I’m not a big fan of 529 plans. I’m not going to go into the reason why, but depending on the age of your children, or if you’re someone out there that wants to do something for your grandchildren, I love this strategy of using, now don’t get upset at these words, life insurance. Not for life insurance, but to build cash value inside the life insurance that kids can use, or the parents can use to pay for college education tax free. And that does two things. First of all, the money is inside life insurance, so it’s not countable on the FAFSA, against for financial aid. So you can have wealthy people that have most of their money in life insurance and annuities, and they will get financial aid because those are noncountable assets.
Gabriel Lewit: They know how to play the system a little bit.
Steve Lewit: Play the system a little bit.
Gabriel Lewit: Yeah.
Steve Lewit: So, the strategy would work like this, Gabriel is, let’s say I want to do something for my grandkids or my own kids, is I could buy a life insurance policy on my son or daughter, build cash value. I own the policy. And then when those kids need funds for their college education, my kids just dip in and do it for their kids. Or the parent dip in and takes that money out for their kids all tax free.
Gabriel Lewit: So, it’s a very interesting alternative to the 529. It’s interesting because they just came out with a rule in the Secure 2.0 Act that just came out that you can roll over some of your unused 529 plan. So one of the downsides traditionally of a 529 is if you end up not needing the money, well, you would have a penalty taken it out for anything other than school. Now, there are some other ways of manipulating it and bringing it, giving, changing the beneficiary to your grandkid or something like that.
But with life insurance, what’s interesting is there already was a built-in benefit of if you never spent it on college, didn’t matter because it wasn’t really explicitly designed for college. When you take out tax-free income via policy loans from the life insurance won’t get too deep into the mechanics of how it works, they don’t care where you spend it. So most of the time when we use it for college planning, the point is to use it for college. But if you had a hundred thousand dollars in that policy that you saved up for college and then your child gets a full scholarship or decides not to go to school.
Steve Lewit: Doesn’t go to school, yeah.
Gabriel Lewit: Uses half of it, the entire remaining balance can just roll forward and be used for whatever amount, again, tax free. And so it gives you better financial aid. It gives you, in many cases, greater amounts of income to take out because of just some of the mechanics. And it also gives you a very high degree of flexibility on what to use it for. And it’s a very little known approach for how to save for college.
Steve Lewit: And it has my two favorite words in there, tax free.
Gabriel Lewit: I already said tax free.
Steve Lewit: I know you did, but-
Gabriel Lewit: You know I said that, right?
Steve Lewit: I am reemphasizing.
Gabriel Lewit: I’m just kidding.
Steve Lewit: You’re getting me back.
Gabriel Lewit: Do to you what you did to me.
Steve Lewit: You’re returning my favor.
Gabriel Lewit: Yes.
Steve Lewit: Yeah. So folks, my two favorite words, tax-free, if I could get all your money into tax-free buckets, that’s our goal.
Gabriel Lewit: It’s a good goal. Absolutely. Yeah.
Steve Lewit: Well, we actually do that for some people. We get them into a zero tax bracket.
Gabriel Lewit: We do.
Steve Lewit: And it is amazing what you can do if you really understand the laws and are focused on it.
Gabriel Lewit: So that’s more of a topic in detail. Producer Katie, I think, I don’t remember if we’ve officially actually discussed what we call the zero tax plan for retirement on the show, but that would be a good topic for a deeper dive.
Steve Lewit: Yeah. Let’s do that.
Gabriel Lewit: Where we really dive into the mechanics of how to make that happen. Some people, when we go through the concepts of that, they say, well, that’s too much work.
Steve Lewit: Or it’s too good to be true.
Gabriel Lewit: But for the clients that do it, it works great. And it really isn’t too much work, funny enough.
Steve Lewit: No. Look, we have folks in very high-income brackets normally that are spending 150, $200,000 a year paying no taxes.
Gabriel Lewit: Yeah, absolutely.
Steve Lewit: So that would be a great show, Katie. And then when you put your headphones on, Katie, you can participate.
Gabriel Lewit: You keep trying.
Steve Lewit: We keep trying.
Gabriel Lewit: You keep trying. All right, our friends, thank you so much for tuning into our show here today. We really love talking to you here and spending some time together. And we are wishing you on behalf of Steve and I, a very, very Happy New Year for everything, not just money, but for life, family, health, wealth, friends, friendship, activities, you name it.
Steve Lewit: Amen.
Gabriel Lewit: And so of course, if you have any questions about the money side of things or how we can help you, give us a call here at (847) 499-3330 or go to sglfinancial.com, click contact us, and we are here to help you anytime.
Steve Lewit: Stay well, everybody. Happy New Year. Be good.
Gabriel Lewit: We’ll talk to y’all on the next show.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330, or visit us on the web at sglfinancial.com and be sure to subscribe to join us on next week’s episode.
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