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Episode #478 - Widowed in Retirement Navigating Financial Changes

Roger: Experience is what you get when you didn't get what you wanted. Experience is often the most valuable thing you have to offer. 

Randy Pausch, The Last Lecture.

INTRODUCTION

Are you there? Welcome to the Retirement Answer Man show; Roger Whitney here with you. This is the show dedicated to helping you not just survive retirement, but to lean in and have the confidence because you are doing the work to rock retirement. 

Excited to have you here with me today. Got a couple announcements and we'll set some targets and then we'll get going.

ANNOUNCEMENTS

Really only one announcement today is that we have our annual listener survey, live and active. 

If you want to give us feedback on the show to help us create a show that serves you best, click the link in our weekly 6-Shot Saturday email, which is our summary of the show where we share links to things that we talk about and give us your feedback. Nichole and I read every single one, and we use it to help iterate on making a show that empowers you. If you don't receive our 6-Shot Saturday email, you can go sign up for that right at the homepage at rogerwhitney.com, right on the right-hand side, or you can go to 6-ShotSaturday.com.

TARGETS 

All right, what are we going to do today? Let's set some targets for today. 

Number one is we have installment three of our month-long series of going from two to one, how to navigate widowhood. If you are married, you or your spouse is going to deal with this statistically for sure, whether you're married or not.

You are going to have someone you care about deal with this, helping someone navigate maybe just a little bit better. This, or being supportive of someone can make all the difference in creating a better world. So we're going to talk about the financial impacts of going to widowhood today when Mark Trautman is going to be here with us again; he's so awesome.

We're going to feel a little bit more comfortable today. If you're a project management oriented last week's non-financial side can feel a little bit uncomfortable, but just as important. 

So that's what we're going to do with Mark today. And then next week we're going to work on how we build a toolbox or a playbook to help yourself navigate this and do future planning, even if it happens way off in the future.

So that's going to be a target. We're going to have our question-and-answer segment today where we're going to answer your questions about withdrawing money from IRAs at 59 and a half, the five year rule for Roth IRAs, refilling cash buckets ACA before Medicare. And then in our Bring It On segment with Mark Ross, we're going to talk about passion.

When you leave work, you have to have projects, happy people have projects work. It just becomes what are your passions that you're going to pursue. So, Mark and I are going to talk about that. With that, let's get going.

PRACTICAL PLANNING SEGMENT 

All right, we're back with Mark Trautman. How are you doing, Mark? 

Mark Trautman: I'm doing great. How are you doing? 

Roger: Good. Good. I was reminded today, Mark, of a myth when it comes to somebody that has lost a spouse. I want to start there and see if you agree with this or not, and I used to tell people this, okay, you've lost a spouse.

Don't make any decisions for at least a year.

That's not really true. There are a lot of decisions that can't wait. I would imagine when it comes to money and finances, wouldn't you agree? 

Mark Trautman: I would just insert the word big. Don't make any BIG decisions, such as if you don't need to sell your house for cash flow. Let's say, decide not to sell your house and stay in for a year, or move, right? Some people say, I need to get out of this area and reset myself. That might be fine but give yourself some time to digest before you make any big moves. So, I would just insert the word big there. 

Roger: Good point. Good point. In an emotional state, there's a lot of big decisions that seem like they're good at the time that might not be.

Mark Trautman: Or irrevocable, don't make any irrevocable decisions. 

Roger: We're going to talk about the financial aspects today, and maybe we'll tease out what are the bigger decisions and which ones you really do have to deal with because there is some triage that has to happen. We're going to use the same kind of framework of what are we talking about here, the objective in dealing with finances and some of the obstacles, and then maybe some resources. Then next week we're going to try to create some frameworks for how to actually take action in an iterative way. I imagine that's critical. I know that's critical because it can feel like you're stuck in the water. You have to be rowing, even if it's just dipping the paddle in the water, not necessarily doing huge strokes.

There has to be some forward progress, whether it's on the personal side or the financial side. So that's sort of the setup. 

When we're talking about financial aspects, Mark, what changes occur when you go from two to one? What's your experience? 

Mark Trautman: Well, certainly if you are both working, one person may not be bringing in income anymore.

That was not my case, but I could totally see that being the situation, depending on who was the provider of healthcare. In my case, my wife was still working primarily for healthcare, and that changed abruptly. When she stopped working, we needed to get new healthcare. We decided to stay on COBRA for a period of time.

It was quite expensive, and we thought that the ACA just wouldn't work as well. Subsequently, I found that I was wrong in that respect. It probably would've been just fine to switch over to the ACA. I'm on it now. It's been a great plan. Where is your money coming from? Then things like health insurance, where is that coming from? 

I guess if you were on social security, or two people on social security, one of those is going to end right away. Determining where your cash flow is coming from and solving for that puzzle would probably be one of the most immediate things other than the normal things such as funeral costs and having a celebration, which we did for my wife, and those are the obvious things.

Once you get past that, where's your money coming from? How are you covering healthcare and things like that? And you have a pension, does it go to the survivor benefit?

All those aspects. I would say.

Roger: I think when I think of this topic, we'll start with cash flow, right? As you did. 

There is, what are the immediate impacts, say, income standpoint, and you mentioned a number of them, does the pension continue? Is there income that's going away because that income source goes away. Social security, do you go from two to one to social security, et cetera. 

There's the immediate impact, which is part of the triage, but then there's longer term impacts too from an income standpoint, right? In terms of social security and part-time work, and also from a tax standpoint. I know we're going to get that way.

Then on the lifestyle expenses, you have those initial costs. You mentioned healthcare. You also have a delegation of duties that might have to be filled, whether it's lawn care or tax prep or handy person who does those things and you either take that on yourself or you have to outsource it, which is going to cost money, right?

Mark Trautman: Yeah. That was my experience. I was kind of the outside of the house worker, I guess you would say. Lawn care, fixing things around the house, even doing minor repairs on the car or whatever. She was more the inside of the house person. She did a lot of the cleaning, the cooking, the shopping, and we kind of divided and conquered, and that's where our strengths were.

Then when she was ill for long period of time, I already had to kind of pick up a lot of those things. I was kind of learning along the way, but now I do everything and I probably should start learning to outsource more, that's a muscle I'm trying to exercise. I get more comfortable with just paying people for doing things. I'm kind of one of those people that says, if I can do it, I should just do it myself. Even though from a time perspective, I probably should pay someone to do some of those. 

Roger: Yeah, and you had some runway to start picking those things up as you walked the illness that she had. Sometimes if it happens suddenly, you certainly have a triage.

I got to pay somebody to do along because I'm in the middle of my grief.

Mark Trautman: You think if you have children too, right? If you have young children, I mean, a lot of that really changes things. My daughter was 21 and pretty much on her own, so I didn't have that aspect. But I've had friends who have lost a spouse that have had very young children, and boy, that is a huge, huge change.

Roger: Our goal here, just as a reminder, is to try to tease these up so they come to our consciousness so we can start to think about all the issues that are important to think about. Either in future planning or because you are in the whirlwind right now. Let's go to financial management. What changes from a financial management standpoint?

Mark Trautman: It was interesting, because now that I'm basically two years past when she passed away, and I'm a tracker, so I track everything, and I was kind of very curious. You hear about some of your expenses will go down and others won't. So, I was really curious to see, looking back, how much did my expenses really change?

Surprisingly, they do not change by very much at all. I would say was in the neighborhood of a 10% decline, but certainly not a 50% decline. 

Now, we were already basically living off of our portfolio, so the income side didn't really change all that much, so it wasn't a material issue. But if you, let's say, have social security and one of the checks goes away, or you have a job that is no longer paying, then if your expenses don't drop down proportionally, that can be a very difficult situation to be in.

I would just say that my experience is that those expenses really do not decline significantly at all. You think about how much your housing cost is, probably isn't going to change, your utilities aren't going to change, your food was probably the only thing, groceries, but that's not a huge percentage of your budget or at least it wasn't in ours. 

Now some things like travel, yes, you're only going to buy one plane ticket instead of two and things like that. But it was surprising how little the expenses dropped.

Roger: Food as an example, what I've experienced in walking this with others is that, okay, yeah, your grocery bill may go down, but other bills go up. You may be going out more. Yeah, it's definitely not going to be cut in half like say potentially your income would be. 

Mark Trautman: In some cases, I would say that if you have a life insurance policy on that person, that helps you get over this period. So, my wife did have a term policy that still was in effect, and we kind of were of the opinion that once we were kind of financially independent and didn't need those anymore, we would just let them lapse.

Hers actually was still in force, so there was a payout there and that was helpful. When we get to kind of Roth conversions and stuff, that was helpful in accelerating that. People should look at, if this were to happen, do you have a life insurance policy that can help come in and help during this period of time?

Roger: Well, let's talk about that for a second, because the common wisdom, the optimized wisdom, is that once you're financially independent, assuming you reach it, you no longer have the need for life insurance because you can self-insure, you have enough assets to support. Which is true on paper, but having some death benefit payouts come in creates a lot of buffer for all of the unknowns and allows you not to have to make any adjustments to any of your assets because you have this influx of tax-free liquidity essentially, right.

That doesn't really get captured on a spreadsheet of whether it's for the final costs or just simply to pay your bills for the first year, so you don't go try making tons of changes to your investment or retirement plan.

Mark Trautman: Yeah, like you said, there was no need to kind of raid a retirement account or make any major changes anywhere because this extra money came in and it certainly was beneficial in some of those final expenses. I was able to do some things that I might not have done had that money not just been kind of unexpectedly come in. I mean, I guess you could say expectedly, because we knew there was a policy out there, but you don't really think about it until it comes through. Then, like I said, just a lot of those other things, you just don't feel the need to go and raise cash from other areas to make that happen.

I had a term policy and I had let it lapse because my term was up and I just decided not to renew it. I'm not even sure they would've insured me because I had no income. Sometimes they're like, you’re better off dead than alive if we give you this big policy so, we're not going to give it to you. But hers was a term policy that was in effect for many years prior, and it was a low annual cost, so we were just like, well, we'll just let that term go over time. Ultimately it did pay out, so it was beneficial. 

I would say if you do have a term policy and it's a low cost, maybe it's something to consider at least letting go to the end of the term and not terminating it early even when you reach kind of that financial independence crossover point.

Roger: I guess it helps you avoid making big decisions sooner because you have all this financial flexibility.

Now, in your case, you are responsible for the financial management of your life, at least on the financial end. Were you doing the day bills or was she?

Mark Trautman: Yeah, I was basically doing all of the household finances from just paying the bills to managing the assets to everything really.

Roger: From this aspect, you didn't really have to miss a beat there, whereas if you were to pass first, all of that would've gone to her right away. 

Mark Trautman: Right, and we have automated everything. So literally, I've told my daughter, like if something happens to me, probably in about 12 months, things will start kind of falling apart. But kind of like the paycheck comes in automatically from the investment account and the credit cards are paid automatically from the checking account in full every month we do not carry balances. But it kind of is an automated system and it would've worked for her for a period of time before she really would have to dig into like, how are all the mechanics of this automation working? So, in some respects, I feel like that would've been okay if the roles were reversed from that perspective.

One of the things that once we joined the club, as a matter of fact, we were getting on board with everything and having monthly meetings and she knew everything, knew where all the passwords were. We had a place in the house where all of the information was that she could go to. Now my daughter knows where and how to access that if the case were to arise.

I feel like we had done a lot of that in advance, but since I was the one that did all of that work, it was easier in that respect.

Roger: Yeah, and so from a cash flow management, you were able to use automation, and as long as there's enough money in the account or coming into the account, then stuff gets paid on autopilot, so you don't have to worry about stuff like receiving the water bill in the mail and how do I log in to pay that account? 

Mark Trautman: As I said, the only thing that would not work is, and I hear the garbage truck outside, is they're the only ones that actually require me to physically have to do bill pay. But I was like, when the garbage starts piling up, maybe you should start looking into things.

Roger: So that's one way to organize the cash flow end of it. When we think of the "retirement income plan" and you and I were just talking about this at the beginning before we started this chat because I was asking you for some ideas. Having some summary of what the plan is and context as to why it's that way can go a long way in helping somebody pick the football up and run with it again.

Mark Trautman: Yeah, and I mean, I have a kind of a one pager that is like the summary financial plan, and behind that there's a whole bunch of information, but it's part of that same book that someone could step in and say, okay, I see this was the plan for the year. Then I check those things off as they happen. So, they're like, oh, they've already done this, and it's beneficial now for my daughter if something were to happen to me but it was also something that we would both look at as part of our monthly kind of meetings. 

It was a summary plan document, in essence, of our financial plan. 

Roger: Yeah, which goes a long way in okay, I understand what this person was doing, and that's what we're working on in the course to summarize the retirement plan of record, essentially.

Now, in your case, you were self-managing, and you were capable of doing due diligence on who you use and what you use. But part of the financial aspect of the surviving spouse is over time, they're going to have to create an entirely new plan that's designed around the one of them, right? In your case, you probably would do that yourself.

It's important here that if you're going to use someone or something, that you find a safe place to be able to do that. 

Mark Trautman: Yeah, I think about that. If something were to happen to me and my daughter would have to kind of take over the job, right? 

Roger: Right. Because she is probably extremely capable, but she would probably want a guide and some people just because of their nature, want to delegate it to someone.

Mark Trautman: Yeah. We've talked about that, and I would say talk about that with your spouse so that they know where a safe place to go would be and maybe even talk to your children. So, in my daughter's case, she knows some people, as a matter of fact they're actually part of the club. But elsewhere, like even if they aren't the people that would do it, they would help her know who an appropriate person would be to help her. 

Roger: Yeah, exactly. One way that I've seen this navigated Mark, when a couple isn't using an advisor or a planner that they have a long relationship with, they're doing it themselves. They would like to continue doing that, but one realizes that if I go first, because that is my job in the relationship, that the other one is going to need somebody as the guide, is to start to establish at least some connection informally in the event that something happens.

Essentially, if I die, call this person, they're a safe place. At least there's some familiarity in relationships. They're not starting from ground zero. 

Mark Trautman: Yeah, and it may even be worthwhile to, even if you're a do it yourself or run your plan by somebody else that at least understands your situation better.

It may not be an annual thing, it may be once every few years, but at least that person would then be able to go to somebody who has a somewhat of an understanding of what their current situation is. 

Roger: Yeah, and from a qualitative standpoint, they feel like is a safe place. I have more than I can remember probably of arrangements of "if I die, they're calling you", right. Just informally because you need somebody to pick up the baton. During this time, I also think if you're not the financial manager, this is a time of risk from that perspective too. 

Mark Trautman: Yeah. I mean that spouse, widow, whomever, is potentially vulnerable to kind of predatory people that find out people do look through obituaries, for example, and make phone calls.

So yeah, be on your guard if you're the one that was not the one that was doing all the finances, kind of like don't make any big decisions, that would be one big decision to be very careful about making if someone calls you out of the blue.

Roger: Recently we had a house burn down in our neighborhood, like a block away.

The next day we're walking the dog and we're talking to a neighbor right across the street, and there were four or five different contractors that were already staked out in front of the house the morning of, trying to connect with the homeowner to rebuild it. Same thing happens.

Even if it's not opportunism, it could be Uncle Bob just wanting to help out, but Uncle Bob doesn't know what he's talking about. 

Mark Trautman: Yeah. I could totally see that as well, and I've seen that in certain situations. Family or friends. 

Roger: Yeah, just taking advice from people that they shouldn't take advice from.

Like taking advice from an estate planning attorney on corporate litigation, the competencies don't necessarily map over very quickly, so that can be a risk, I think. 

Let's talk about taxes. Now this is less of a triage thing. There are some triage things from a tax perspective, and there's some longer-term implications to going from two to one.

So, what's been your experience with that? 

Mark Trautman: Yeah, so that is kind of an area that I have an interest in. So, I was pretty well versed on what the aspects would be in that situation. 

So, one of the first things that I did was, of course, after a month or two, but she passed away in July so there's only a certain amount of time left in the year to do certain kind of tax planning things.

One of the things I did was I filed Form-706, which is the estate tax return to take advantage of what's called the DSUE, which is the deceased spouse unused exclusion. 

So right now, each individual has approximately 12 million of lifetime exclusion, and by doing that, you can basically take over any unused amount of your spouse and add it to your estate down the road.

It sounds complicated, it's actually fairly easy. You just have to determine the assets of that individual that were theirs alone, like their IRA and so forth, and then the shared assets, it would be their percentage ownership of that. 

The big thing for us was the house. So we had to get an appraisal or I had to get an appraisal of that, and it had to be as of the date of death.

I did that, filled out the form. So now I have a pretty large exclusion that she did not use that my estate could use down the road. Now, it may not need that. Maybe my estate will be well below that, but it's something you might as well do and have. So that was kind of one of the first things.

Roger: That one that you can do after the fact?

Mark Trautman: Yeah. You have up until, I think technically, I'd have to look it up, but it's like two years and I think they just expanded it to something like five years because people weren't doing it.

Roger: This isn't going to help you if you sell the house, it's just your death. 

Mark Trautman: Right, but actually when I sell the house, there is a step up and basis for her half.

So by having that valuation, I have that number as to what the appropriate step up basis is for her half. And so that is beneficial as well.

Roger: To get the step-up basis on her half of the house ownership in your case, it's having an appraisal or something to hang your hat on in the event of audit, if and when you sell the house of what the value was at their death.

Mark Trautman: Yeah, and our house has gone up quite a bit in value. I would owe some capital gains, even with the exclusions. That's the other thing. I'm not going to utilize this, but if you were to sell the house within two years, and this is not tax advice, so talk to your tax advisor, but my understanding is that you can use that married exclusion of 500,000 up to two years after the date of death if you sell the house.

What I don't know is, does that also include the step up in basis as well? If so, if you were to decide to move, maybe that timeframe would be critical. It's not something I'm going to utilize, but something else to think about.

Roger: Yeah, and these are things that potentially could be significant savings just by thinking about them, right? Like the stepped-up basis by itself. 

Mark Trautman: So that was step one. I wanted to do that, get that done, get that behind me. Also, so the appraiser wasn't looking back three years and trying to figure out, well, what was the value three years ago? So, it was a little easier to get somebody in and they were only looking back a couple of months in that case and was a lot easier to kind of figure out.

Plus, it was helpful for me to decide, well, if I did decide to sell the house within two years, what am I looking at from a tax perspective? 

The next big thing was the year of death. You still can file married filing jointly as if they were alive at the end of the year. So that was the case in 2021.

Then my daughter, since she is a full-time student and a dependent under the age of 24, the following year, I could use the qualifying widower status, which is effectively the same as married filing joint.

I had this kind of two-year window of, should I be doing some Roth conversions at the married filing joint level before those tax brackets get chopped in half? Our plan was that she was going to be retiring. We had this very long runway of doing Roth conversions as a married couple. That was kind of the initial plan, then that changed. 

Then I had to make a decision, do I want to accelerate some of those conversions into earlier years and I decided to do that. Again, that's where that life insurance came in handy to basically be able to pay the tax on those conversions because otherwise, I would've been scrambling for how am I going to pay for the tax on this two years of fairly sizable conversions.

Roger: The fulcrum that you're placing this lever on, and I want to make sure we highlight this, is that from a tax perspective, if you're married, you're used to filing joint. When you lose a spouse, you will convert to the single filing tax bracket structure, which accelerates you up the tax rates much quicker basically by double, correct?

Mark Trautman: Yeah. Basically, your brackets are cut in half.

Roger: Right, so in your example of doing a Roth conversion, you're going to get into higher tax brackets a lot quicker, which will impair your ability to do Roth conversions at a similar tax rate. You have a window there if a spouse dies in January for that entire year, you're filing, married, filing jointly. So, you can still use that tax bracket. 

So that's one of those things that you just want to be aware of. 

Mark Trautman: Yeah, certainly something to put on your kind of near-term plan to at least talk to somebody who's well-versed in taxes and understand is there something I should be doing that I would not normally be doing in given this situation. You also are looking at, well, what are my RMDs going to be down the road?

Of course, those are going to be taxed at a higher rate as a single person than it would be if we were taking RMDs as a married couple. So that was part of the reasoning behind moving some of those conversions forward. 

Roger: This is where this can get foggy really quickly. When you move to the single bracket, you not only have higher tax rates at same level of income, say in this year. But assuming you never get remarried, you'll have that forever. So, your required minimum distributions, as you're talking about, could throw you into a higher bracket than you were originally estimating later on. Then we have things, the brackets for IRMAA, Medicare surcharges, are going to be different as well, or social security taxation are going to be different.

Mark Trautman: Or social security claiming, actually. That was something that I was not familiar with really at all, was the kind of survivor benefits and how they work. Something I found out very interesting is I was the higher earner, so I was always going to delay the 70 for the largest benefit, but what I found out was that as a widower, I could claim benefits on her record, and I can do so as early as age 60. 

Now, of course, that's less than I would get if I waited to my full retirement age, but it doesn't affect my own claiming. So basically, the math works out in my case to claim at age 60 on her record, which was a lower record, and take that for 10 years.

Even though it's lower at age 60, it's still more in dollars over 10 years versus waiting to 67 and getting it only for three, letting my own benefit grow to age 70, and then switching to my own. That only works for survivor benefits, not for spousal benefits. 

Roger: I have actually seen instances where people have missed the opportunity to do that. 

Mark Trautman: I don't even receive her statement anymore. I wouldn't know to go in to claim this. 

You have to kind of know this. You might say, oh, well, maybe there's a survivor benefit, but I'm not eligible for benefits until age 62. 

Well, that's normally the case per spousal benefits, but survivor benefits actually are at age 60.

If you don't know that, that social security office isn't knocking on your door saying, hey, by the way, you're missing a benefit. 

You kind of need to know it to be able to request it. 

I'm not 60 yet, but it's now part of my plan and I've modeled that into the new plan. 

Roger: What other aspects? So, we covered expenses, some of the changes that are going to happen there, income sources, financial management. 

The tax management is one that could potentially be tens, if not hundreds of thousands of dollars depending on the situation. 

Anything else within the financial aspects that people should be aware of? 

Mark Trautman: One of the things that I would say, and this book just came out and I would suggest people potentially peruse this book, it's called After the Death of Your Spouse by Mike Piper.

He goes through a lot of the financial, kind of to-do's both on the near term and intermediate term basis. I think it's like 120 pages. Super easy read. 

Roger: Yeah. It's not big. It's an action-oriented kind of book. 

Mark Trautman: Yeah, and if it were me today and she was alive, I would buy this book and just stick it in with that other thing. Because it is literally a checklist of what you really need to do. And it is mostly financial. It's called the Next Financial Steps for Surviving Spouses so that would be a great guide for someone just to kind of figure out what do I need to do? And it talks about many of the things, but there's many other things as well.

Roger: Checklists and things like this are important because it's impossible to remember them all. 

Mark Trautman: Yeah, and there's like reviewing your beneficiaries, doing things like, well, I had to switch her IRAs to inherited IRAs. 

Here was a big tip. I'm under age 59 and a half, so normally you would just think, oh, I'll just combine it with mine as a spouse, and there's an advantage to keeping it separate until you turn age 59 and a half. Because I can access her inherited IRA at any time without the 10% penalty because it's an inherited IRA. 

Had I combined it with my own right away, I would have to wait till 59 and a half to have any access to that. So, keeping them separate can be useful.

So again, talking to somebody who's well versed in this before you make any quick moves, because even when I talked to my custodian, they were like, oh, we'll just move them together.

I'm like, whoa, don't do that, keep them separate. But you need to retitle it, it needs to be titled correctly. I did change the beneficiaries, update the beneficiaries in all of my accounts.

There were a number of things that you do need to think about, and those can be kind of more intermediate. They don't need to be done immediately. 

But again, another thing, don't make a big decision right away that like, I'll just combine these, because that's what you're supposed to do. If you're pre 59 and a half, I would say it probably makes sense not to do that.

Roger: That's a really important thing that we'll want to make sure we incorporate next week. 

There are certain things where speed is important. You name some in terms of the step to basis, the window for Roth conversions, or even just with withdrawals of various sorts with using the tax categories. 

But then there are other things that speed is not necessarily a benefit because it's important to have time to really consider certain things.

This the example of converting to a Roth or inherited IRA is a good example of one.

Mark Trautman: Here's another example. So even before she passed away, we knew there was this insurance policy. Towards the end, we wanted to review the beneficiaries and we actually changed it so some of it went to my daughter directly.

If it all went to me, I would have more difficulty gifting her, because of the annual gift tax exclusion. 

It was a way to get around that by changing the beneficiaries. So, there are a lot of things that they're moving parts that you want to think about ahead of time, for sure but that was another example.

Roger: Here's all the "what" of just touching the surface on the impacts of the financial aspects. 

The objective here is to do the basic triage and eventually come out with a strategic plan or retirement plan designed for you. 

That's the objective. We hit on a ton of obstacles already, but overwhelming for sure. 

You can see just from Mark and I rattling things off, there's a lot of stuff to think about.

What can happen is, the noise of all of these possibilities can drown out the focus on what's important now. That's what we're going to work on next week, on how do we manage this project of closing out of life and refreshing the new life and make sure that we're focused on what's important now and not things that really aren't that important.

A good example is, as you were talking about, converting to an inherited Roth. 

That is one of those things that people do very quickly. Because they're grabbing for agency and it's an action they can take, and people are generally telling them to do it. It's easy just to do that quickly when you can actually take your time on stuff like that.

Mark Trautman: Yeah, and even things like distributing money from an IRA, let's say you want to disinherit or step aside and let the next beneficiary take that account. Well, if you take any withdrawal from that account, that upsets the ability to do that. I forget the exact term for what that's called, but you can basically say, I don't want to be a beneficiary of that account and it goes to, in my case, it would've been my daughter. 

So again, don't do anything quickly because maybe it's irrevocable.

Roger: “Overwhelm” is definitely a big obstacle. 

Another big obstacle is just simple, bad advice, and that doesn't have to mean in a nefarious sense, it should be the person doesn't know what they're talking about.

I was just on a call the other day for an hour with a client working through an old retirement plan they had. Very often when you're talking to the providers of various financial products, and a lot of times planners, they get it wrong because the rules are really complicated. I even looked at RMD rules now with the new ages.

That can be complicated and if you don't know what you're talking about, you can't expect everybody to know what they're talking about. There's a lot of bad advice that can be obstacles. The ability or interest in this from the person going through it. We talked about the different types of people that grieve.

Some people like Mark, they go into project management mode. On the financial parts. 

Other people go a hundred percent the opposite direction as fast as they can and ignore it, and that can be an obstacle. 

Another one is old relationships, of maintaining old relationships that you don't have any connection with.

This could possibly be a planner or an advisor and not building your own relationships and having that relational currency. Any other obstacles you can think about? 

Mark Trautman: Well, there's plenty, but we could be there for hours.

Roger: Hence the overwhelm. So, Mike Piper's book is a great one. We have that listed. We'll have a link to that in the show notes. 

Let's talk about a few other books. Jordan's book, I think we talked about that last week. 

Mark Trautman: Yeah. It's called Taking Stock, which is really thinking more about now, and this would be good for anyone just kind of using the experience of a hospice doctor who has talked to people who have, you know, been at the end of life and have just said, these are the things I wish I had done.

So, it helps you think about that. 

I can't really think of any other books off the top of my head.

Roger: I know the AARP has one good book on organization. In the club we offer Everplans, which is a digital organizer that puts it all together in an easy way. Everplans I'm a big fan of, because it works like a TurboTax. AARP has a book that goes through essentially worksheets on answering the questions, just an analog form. (AARP Checklist for My Family by Sally Balche Hurme)

One page I think that's important to have would be, who do I call? If there's an advisor or the planner involved, what is their phone number in their email and their assistant's email? The insurance person, the benefits person, the trusted friend that can be that counselor and partial guide.

Mark Trautman: I would say another thing, and this is one thing that’s kind of in my binder book, is a detailed net worth statement. So, it shows all of the accounts. 

Instead, just saying, cash is this, investments are this, it's all of the different investment accounts, all the different savings accounts. So, if something were to happen to me, at least they would know, oh, I need to go to this institution, there's an account there, or I need to go to this or find this statement or what have you.

It's very easy if it's all on one kind of net statement, well, we know what all the assets are, and we know what all the liabilities are, and we know at least where to go looking for these things.

Roger: Whether it's in a software or on paper. It's critical because the old days it used to be just wait for the statements, but they don't come in the mail anymore.

So next week, Mark, you and I have the task to put together a simple framework to focus on the triage and then how to start taking baby steps, because this definitely will be an iterative process. We're also going to bring out another gentleman that works with Wings for Widows to do the same, to try to help empower you with some frameworks.

If you're going through this, you have some structure to start to organize it so you don't get overwhelmed.

LISTENER QUESTIONS

Now it's time to answer your questions. 

If you have a question for the show, go to rogerwhitney.com/askroger, and you can type in a question or you can leave an audio question and receive my endearing thank you for having your lovely voice on the show. 

So, these shows are getting a little bit longer.

Maybe that's something we need to know in the survey: do you like that? 

My attitude on how long the show should be, as long as it needs to be. I don't want to drone on, but I don't want to keep it too short, so we'd love your feedback. 

QUESTION ONE

All right, so our first question comes from John, is a question related to, I'll read a little bit more. I was going to summarize it.

This question is an offshoot of the rule of 55 for 401K withdrawals where a person can actually start taking those withdrawals during the year they turn 55, assuming they leave work with the employer that they have the plan at after they turn 55. Just to make sure we're clarified.

"So, if my birthday is in December of a particular year, does that mean I could start taking as early as January of the first year when I am still 54 years old? I learned this from your podcast. Now my question is related to age 59 and a half, that distribution rule. If my birthday is in March where I will be 59 years old.

Which means I would be 59 and a half in September. Can I actually start taking distributions early in the year? Say January when I'm really not 59 and a half." 

So, John, way to pay attention and ask a good question. 

Unfortunately, no, the wording of the rule of 55 with a 401K and the ruling of 59 and a half IRA withdrawal rules are not the same. In the year of, doesn't work with age 59 and a half in IRAs.

If you took a withdrawal before the magic half birthday, be aware, make sure you get over that, that withdrawal would be subject to penalty. You would probably get two separate 1099R forms come tax season. One with the withdrawals that had a penalty and one after you were 59 and a half and they didn't have penalties.

This is so confusing. Why do they do this? This is how we get to really just confusing stuff. 

So unfortunately, John, no, 59 and a half. It has to be that magic half birthday, just like when we're seven and a half back when we were kids. You’ve got to be careful about that. So, good question.

QUESTION TWO

Bobby has the next question related to Roth IRAs.

Bobby says, 

"For my first Roth IRA, does the five-year rule go a full five years? For example, day one through day 1,825 or calendar five years. 

I opened my first Roth IRA December 15th, 2020. Does my five-year rule end on January 1st, 2026, or December 15th, 2026. So, the central question is how do you calculate the five year rule for a new Roth IRA?"

First, what is Bobby asking about? 

When you open your first Roth IRA, you have to avoid taking any withdrawals of growth for five years to avoid a 10% penalty on that withdrawal. 

So, Bobby, your Roth contribution in December 2022 for the 2022 tax year counts as a contribution on January 1st, 2022 for the purposes of counting for the five year rule.

Five years from January 1st, 2022, means your five-year rule will be satisfied as of January 1st, 2027. I think he had a typo on 2026, it'd actually be 2027. So, it's actually, in this case, it's not that half birthday or anything. It is actually January 1st of the year that you make the contribution is what they're going to focus on, on satisfying the five-year rule.

QUESTION THREE

Our next question comes from Jim related to refilling the cash bucket. My mind was already racing ahead. I'm sorry about that, Bobby. 

Jim says he recently started listening to the show and your podcast and receiving the 6-Shot Saturday email. 

"I've been retired for eight years. Your approach closely matches my financial planning approach."

So great, we're kindred spirits. Jim has a question about the pie cake and understanding the concept of having five years of funding in cash-like instruments to fund from stable sources. He gives a lot of background. The central question that Jim has is how should I handle the cash bucket during a down market?

Jim, if might check out last week's show where we answered this with Kathy in a little bit different way. I'll summarize it here because repetition is a good way of learning. 

One of the reasons we build out that cash flow layer or bucket is to give you margin in your life so you can feel comfortable, even in a bad market.

Doesn't matter whether it's mathematically optimized. We're not trying to mathematically optimize everything. We're trying to have outcomes of you being able to live a great life and have confidence in living that life. 

We got to remember that's what we're trying to solve for. 

So, what happens? After year one, when your five-year cash reserve in this example is now four years and the markets have gone through a bear market like they did last year, what do you do?

Do you sell in a bad market to build out the next step in the staircase? 

Perhaps, but not always, all the time. 

The biggest funding gap typically is going to be between the date that you retire and the date that social capital income sources start, whether that's a pension, an annuity payment, or social security.

The gap in funding that early part of retirement, that's where the gap's going to be biggest, and that's also early in retirement and that's where markets can really bite you the worst, right? From a long-term perspective. That is one reason why we want to solve for it this way. 

What you're going to do, Jim, is you're going to reassess your entire plan.

You're going to refresh your spending estimates short-term and long-term, because now you have another year of data of what you actually spend, and you have a higher resolution forecast of what next year's spending's going to look like, and then it starts to get less high resolution as you go forward.

You're going to refresh all of that. You're going to look at your cash reserves, that five-year, now four-year bucket, and then you're going to look at what you're trying to solve for in this next year. Could it be Roth conversions or avoiding IRMAA Medicare surcharges, or ACA tax credits for healthcare?

You're going to refresh your thinking on that, and then you're going to make a judgment call. 

You could, as part of your rebalancing process, determine where you're going to pull that money from, from a tax category standpoint, and rebalance those portfolios and incorporate drawing money from accounts in that rebalancing process.

Or you could say, ooh, we're in a really bad market. I don't have as much confidence in the world right now, so I'm going to buy ground beef rather than filet. I'm going to go to Yellowstone rather than go to Switzerland and I'm going to moderate my spending, but still have a great life because that will give me agency and I feel more comfortable with that.

Now what you've done with those decisions is taken your four-year cash reserve and actually made it longer because you're not spending as much because you're moderating your spending. 

You could also do a combination of all the things that we talked about, and that's this concept of every year is year one of retirement.

It's not like you're in year two. 

You have to refresh everything annually and recalibrate. 

Every day is day one. The awesome person I was yesterday, when I wake up, I got to create another awesome day. Or the crappy day or crappy person I was yesterday, every morning I wake up, I have the opportunity to be a better version.

It's the same thing with retirement planning. Next year when you do this exercise, you're going to refresh everything. 

That's why we have to have this be process oriented so we can do this in an organized way, so we don't get off track based off of the media and everything else. 

So hopefully that gives you some perspective, Jim. Welcome to listening to the show. Hopefully you'll fill out the survey so we can serve you better.

QUESTION FOUR 

Our last question for today comes from Herbie related to the Affordable Care Act and healthcare before Medicare, and it's an audio question! So, Herb, I give you big Texas Hugs virtually. 

Herb: Hi Roger.

This is Herb Ramey and I have a question about how to pay for health insurers through the ACA before Medicare kicks in.

Regarding retirement spending, the conventional wisdom is that money in a Roth should be the last money you access after pre-tax accounts and cash, but the ACA offers fairly substantial subsidies for those with lower incomes.

So, it would seem that using Roth money to keep your income level artificially low might be a viable strategy prior to Medicare kicking in. 

Does this make sense or am I missing something? 

Roger: Well, that's a great question, Herb. That actually makes sense if you're solving for ACA tax credits because you can draw from a Roth IRA and it's not going to impact you in terms of those credits.

When we think of this, it is important that you put it in the right category. 

This is in the optimization stage of retirement planning. The four stages of retirement planning are vision, then having a feasible plan, having a resilient plan, and then having an optimized plan. 

Optimization is the tail of the dog, you being the dog, my friend. 

We're not going to get this right. You're not going to get this right. So, you have to make a judgment call, and this could be a year by year judgment call. 

You could say this year, ACA is so important to me, and having very low premiums is going to help me in the totality of my plan that I'm willing to draw from my Roth accounts in order to get those subsidies.

That is a reasonable judgment if you're trying to solve for having very low healthcare premiums prior to Medicare. Totally reasonable. 

The key here is just understanding what you might give up in doing that, and that would be the tax-free growth for a very long period of time, typical of Roth IRA accounts.

You're going to have to make the judgment call of which one's more important to you in that given year. 

If this year you say, yeah, ACA credits, I want all the ACA credits. I want it to be as low as possible on my healthcare, great. Make the judgment call, do it this year. 

Next year. If you're facing this decision as, again, it's perfectly reasonable, if you think through it in an organized way, to say, no I care more about Roth this year. I'm not going to do that. 

The key is the process of making sure you think through it. 

When it comes to ACA subsidies, they just recently extended it. It used to be a cliff, if you earned over a certain dollar, then those subsidies started to go away pretty quickly.

They just recently extended it, I don't know if it was the Secure Act 2.0, I think they did it in the fall last year, where it's capped at roughly eight and a half percent of your income.

Understand what the rules are right now because that might allow you to still get some benefit from ACA tax credits even if you don't draw from Roth's. Whereas when the rule reverts and we go back to modified adjusted gross income between a 100% and 150% of poverty, then it becomes a little bit more material in the impact of credits. 

But I think both are reasonable in this optimization phase. 

You're not going to get it right. This shouldn't impact the feasibility or resilience of your plan.

Just think through it in an organized way. What happens long term if I do it this way, and then I create a carbon copy of that forecast and then say, well, what happens if I do it the other way? That way you at least have some meat to look at. 

With that, let's go to the Bring It On segment and talk about passion.

BRING IT ON WITH MARK ROSS

Bring it on. You know, you're the hero you've been waiting for. So, let's go do this.

Welcome Mark Ross to talk about passion. You know, I'm not sure I like this intro to this section yet. Is it cheesy? Does it hit the spot? How's it feels for you, Mark?

Mark Ross: Hey man, it felt good with that music jive. It's good for me this morning. Thanks. 

Roger: Yeah, I'm really into it. I'm really into old school funk, I don't know why. 

So today we're talking about passion, so let's start. What is passion? 

Mark Ross: It depends on who you ask, and there's so many definitions out there and there's so many people I hear that are seeking for passion. What's my passion? I think it's more than one thing. I don't think it's a singular thing, and I think it can change over time.

Here's the way I define it and the way I live with it. It's like, what do I really love? In this season of life, what's going on? What makes me tick? I love art. I love surfing. I love anything having to do with process. I love learning. Those are my passions, and I could name more.

Roger: Passion is a replacement for work, right?

It's a hobby. It's something you do every day. Like when you leave work, you still have to do something, right? 

Mark Ross: You do. I believe, and I didn't always believe this, but I think you can become passionate about some aspects of your work while you're working. I really do. 

Roger: Yes. I totally agree with that. There's a good book I read that I would recommend on this subject, which you wouldn't think would be a book for this Mark, and it is a book by Cal Newport called So Good They Can't Ignore You.

Mark Ross: Ooh. 

Roger: What he says is, don't follow your passion. That's a horrible thing to tell kids. Or don't follow your passion, cultivate bringing your passion to certain things. 

Mark Ross: Yeah. Man in hindsight, I lock onto that. When I was going through certain times in my career, like I wasn't aware of that, and it really would've helped.

Roger: Okay. And so how do you go about doing this? Well, what, first off, what are some of the obstacles of finding a passion? 

Mark Ross: I think one of the big obstacles, maybe especially for younger people, younger meaning younger than me, 20. 

Roger: Well, how old are you? First start off, how old are you? 

Mark Ross: Well, yeah, I'm 66 and every time I say that I go, really? Is that really true? 

I have daughters in their mid-thirties and when I was younger, I wanted to know what is my passion, what is my purpose? I pursued that and I was really frustrated. 

I think a big obstacle is trying to nail it down, define it, and maybe confine it into one thing. I don't think it is one thing.

I think it's a big obstacle. 

Roger: As you're leaving work or entering retirement, it's easy to sort of forget those things because you've been so busy, whether it's raising kids or traveling. 

How do you start to explore because you sort of start dead in the water sometimes, right? How do you start to explore it? Do you have to like journal and go on a meditation retreat? 

Mark Ross: Hey, I think it depends on your personality. Some people would really get into that and others not so much. I hear this in the Rock Retirement Club with members who are approaching retirement, maybe they're three, five years out or getting closer and they start figuring out the money piece.

How will I pay myself? Then is what is the meaning piece? What am I going to do with myself and my time?

Sometimes you can freeze. Like, what's my passion? What do I do? I've done this other for so long, I don't know where to start. I would have one word of encouragement for anyone who may be finding themselves in that situation today.

Here's the word, chill. Just chill. Just don't try to figure this thing out overnight. It's not going to happen. It's a process of discovery. Just starting to experiment with little things that interest you, to reignite what you once enjoyed or to try something new that you're not sure about. 

Roger: I think of being bored when you don't have passion and you're just sort of stuck again, and the more you think about not knowing what I'm supposed to do with the rest of my life, the bigger this cloud becomes until it becomes overwhelming. 

A lot of times people push back against passion in terms of what am I supposed to be doing after retirement because they're like, everybody talks about it like, you’ve got to change the world.

Like I have a pretty big vision or passion for myself, right? I want to change the whole landscape of retirement and how you approach it. That's big. That's me, but I'm not the exemplar, I just have my own thing.

It could be literally, I just want to break 80, I want to be a master golfer. I don't know. Sometimes we make it bigger than it is, right? 

Mark Ross: I think so. I think there's a lot of peer pressure in this retirement space where we may see somebody doing something really cool and we think, if we're approaching retirement over there and we're not doing those things, like something's wrong with this because they found their passion.

They're climbing the mountain, they're going around the world, and we're sitting looking at something beautiful that motivates us, that we're passionate about, that we love, but it's about our personality. I really think that, I think it's easy to get stuck and get in trouble if we're not clear about what motivates us.

Roger: So how do you get out from under this cloud of feeling like you have to figure it out and also out of this cloud of comparison of I don't have those big audacious goals that so-and-so has. How do you navigate yourself away from this cloud? 

Mark Ross: I think it depends on the individual. For me, here's a quick story.

I took my daughter when she was younger to look at a college and I happened to know the dean of the school where she was visiting, and I hadn't seen him in years because that's where I went to college. 

He was retiring and someone asked him all the time, you’re retiring, you're going to travel, you're going to do this, you're going to do this.

He says, I don't want to travel. I hate to travel. I'm going to garden. I'm going to play my guitar in the band, and that's what I'm going to do for the rest of my days here, and I'm going to love it. 

That gave me a lot of freedom to say, man, you don't have to have this big, heavy stuff. It's what matters to you. It's a process to figure that out. 

Roger: Okay, and so you're 66, I'm going to call you retired from your career. What are a couple passions that fill you every day? 

Mark Ross: Every day, I'm thinking about looking at or creating something that's a visual art. Love it. I think about it always. 

Do I paint all day long? No. 

That's not my practice, but I'm always thinking about it because it's just part of who I am. 

I love to go out and be outdoors and ride my bike every day. I love the exercise. I love the adrenaline. I'm passionate about that. I work with people individually in a coaching practice. I don't do it all day, but when I'm doing it, I love it.

I have other things that interest me that I'm always listening to and learning about. I love to learn. I'm passionate about that.

I could go on, but that's just a few things that I do that combined are like, those are my passions. I love to do it. It gives me energy. There are also things that I don't like to do that I must do that drain me, but these passions offset that because I have the freedom to do those things and I'm so grateful.

Roger: Now, how do you build boundaries around your passions, so they don't become work? I think of an RRC member that I spoke with, this is years ago now, where he retired and he was an A type personality, and then he started volunteering for his church.

Then six, seven months later, he and I were talking and he is like, I got to extract myself. I recreated my manic schedule. So how do you build boundaries around that? 

Mark Ross: I know how I build them, and I don't like making commitments on my calendar unless they're really important to me. So that's a boundary. What do I commit to? What deadlines do I commit to? I'm choosing to work some in retirement. I set boundaries on how much time and what kind of commitments and what the tradeoff is.

So, my boundary is what am I willing to trade off in the way of what consider a high value of mine, which is freedom. Freedom to choose how I want to spend my time, my day in service of self, and or others. 

Roger: Okay, so let's give someone listening to this some action steps. How do they start to figure out either their passion outside of work if they're still working or start to find their passion in retirement?

Mark Ross: Yeah, sometimes we need a refresh in retirement. Maybe it's been a while since we've thought about this, but I've boiled this down to hey, you can Google search. You can do all of the studies. You can read books; you can do exercises. But here's what I would suggest.

Number one, and it’s really simple. Make a list of everything that you don't want to do that just sucks the life out of you that drains you.

Just make that list, put it aside, breathe, and then make a second list of everything that you really enjoy everything that's life giving, everything that you love to do.

Even if there's only a few things on there. It's a start. 

The next step is to take one of those things on that love list and consider doing something with it.

Experiment with it maybe for a week. Find some people to talk to about that or study up on it or start getting into action and engaging and doing some of it, that's when the test of will this fit me, starts to surface. And you don't have to wait till retirement to do that. You can take small steps now to get a taste.

If you're in retirement, you may be so busy that you have to carve out time for this. But hey, that's your challenge. 

Roger: I imagine even making that list of what innervates me and what energizes me, we can make that into a bigger project than it needs to be. I mean, we could just do it right here in two minutes if we wanted to, right?

Mark Ross: We could. I mean, all this could take 10 minutes. Think fast, right? Fast, type, fast. It doesn't have to be a mind bender.

Roger: Makes me think of the old Elvis Presley song. A little less conversation.

Mark Ross: You find your passion by doing, not really just by searching only.

Roger: The word that we've come with, and I would encourage everybody to embrace it, is dabble. Just dabble. Dabble, right? I like being outside and I like moving. Great. Put on your shoes. Go for a walk. 

There's your process. Just lean into things you like and lean away from things you don't, just like our kids did when they were discovering what they love to do.

If you're still working, I think, Mark, this is a point, is because I'm doing this right now, is set some boundaries so I have time to dabble. 

Mark Ross: Yeah, put dabble on your calendar. Really get your phone, put the appointment, dabble.

Roger: With your most important constituent you.

Mark Ross: That's it. 

Roger: All right, let's go set a SMART Sprint. Let's do it. 

TODAY’S SMART SPRINT SEGMENT

On your marks, get set…

And we're off to take a little baby step you can take in the next seven days to not just rock retirement, but rock life. That's what it's about. 

All right, in the next seven days, put dabble on your calendar, put some dabbling on your calendar, make it an appointment with yourself where you can just explore. I recently bought a book called How to Think Like Leonardo Da Vinci by Michael Gelb.

Big book, It's a little intimidating. I haven't opened it yet, but it has a lot of exercises that you can do in there. 

My dabbling experiment will be to schedule me to do one of those exercises and dabble and just play around with something that is outside my comfort zone. What are you going to do?

CONCLUSION

So, great chat with you today. This is where we're going to share why we do this show and what we're all about, the purpose of our entire organization. That includes my advisory practice, which is Agile Retirement Management, the Rock Retirement Club, and this podcast, the Retirement Answer Man show. 

Our purpose is to empower you to rock retirement, and so our focus is on you and your journey and transition into retirement and rocking it.

We want to make sure you always have hope, and you know about the three components of hope, don't you? You have an inspiring vision for yourself in the future. You have identified the agency that you have, what you can do about it, and then you are working to find pathways to apply your agency, and we want to do this in an authentic way.

We don't have any pretense. We are very capable, but humble and we want to be respectful in how we approach this. 

We want to be curious. We want you to approach life with fresh eyes. That's what we try to do. We want you and I to hold up beliefs for examination so we can reconfirm them or alter them and adjust them based on new perspectives and ideas.

We want to be free from big finance. We work for ourselves. We are not going to talk to you about products for money. We're not going to do gimmicks. We're going to try to create solutions for you and tell you about them. 

We want to focus on you taking acting. You taking incremental action is really all I care about.

Whether that's actually doing something or expanding your perspective so you can lean in a little bit and have more confidence. 

I'm all in on this. I know my team is all in, I think you are. So, let's go do this. 


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