Ep 86: Cash Flow – Measuring & Monitoring the Heartbeat of Your Financial Planning

Ep 86: Cash Flow – Measuring & Monitoring the Heartbeat of Your Financial Planning

Listen Now:

The Smart Take:

Do you know what it costs to live your lifestyle? Many successful people don’t. They haven’t had to worry about money, live below their means, and save diligently.

Yet, when it comes to retirement planning, you need to know these costs. On one hand, you need to make sure you have enough and don’t run out of money. On the other, you need these costs for proper investment and tax planning.

Hear Kevin and special guest Tyler Emrick, CFP, CFA discuss the importance of cash flow and several client stories where it made a huge impact. You’ll hear different ways to measure lifestyle and how you can jump-start the planning process by taking a preapproval approach to retirement spending. And be sure to listen to the end where they’ll discuss how to monitor your tax-smart distribution planning to be sure you stay on the good side of the retirement track.

RESOURCES

Want a copy of True Wealth’s free report Plan Smarter for a Lower-Tax RetirementDrop us a line and we’ll be sure to get it right out.

Have questions?

Need help making sure your investments and retirement plan are on track? Click to schedule a free 15-minute call with one of True Wealth’s CFP® Professionals.

http://bit.ly/calltruewealth

Subscribe:

Click the below links to subscribe to the podcast with your favorite service. If you don’t see your podcast listed with your favorite service then let us know and we’ll add it!

The Host:

Kevin Kroskey – About – Contact

Intro:

Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.

Walter Storholt:

Well, hey there, and welcome to another edition of Retire Smarter. I’m Walter Storholt alongside Kevin Kroskey, president and wealth advisor at True Wealth Design serving you all throughout Northeast, Ohio, and Southwest Florida, and the greater Pittsburgh area. You can find us online by going to truewealthdesign.com for past episodes, and lots of great information, and to sign up for a “Are We Right For You?” 15-minute call with an experienced advisor on the team. Kevin, great to be with you once again. Are you all set for the end of the year?

Kevin Kroskey:

Well, Walt, we are in Florida, so we’re set and settled back in Florida. We made the migration.

Walter Storholt:

It doesn’t even feel like the holidays if you’re in Florida, does it?

Kevin Kroskey:

We have our Christmas tree up, and we’re actually recording this on December 1st, and our little elves showed up for the month. We have an eight-year-old and a three-year-old and they really look forward to it. We got the little advent calendar, and we have a gentleman, Aaron, in our office and his wife is a psychologist. So interestingly I asked, “Hey Aaron,” he also has an eight-year-old.

Kevin Kroskey:

I said, “Did the elf show up in your household today?” I was curious because I knew there might be some sort of psychological reason why to or not to do it. And sure enough that no elf showed up in their household. The thought process is the kids should be well-behaved every day. So I thought that was cute and funny. I didn’t share it with my wife. We’re all about using toys and bribes to control our child’s behavior.

Walter Storholt:

Yes. Well, Santa’s keeping an eye on the kids year-round, whereas the elves, they’re really just popping in for a month. So I like her strategy there.

Kevin Kroskey:

Well, you may not be aware of this, but the elves actually go back to the North Pole every night and report to Santa and tell them how the kids were that day.

Walter Storholt:

I gotcha. I didn’t have the elves growing up. We weren’t an elf family I guess, or maybe it just came after my time. I don’t know. Do you guys go all out and do like the different scenes, or do your elves get very mischievous and create different scenes and things like that?

Kevin Kroskey:

Yeah. They were cooking this morning. They were frying up some Sour Patch Kids.

Walter Storholt:

Oh wow.

Kevin Kroskey:

And candy canes. So like just breakfast of champions.

Walter Storholt:

As you would expect from an elf. Fantastic. Well, the end of the year inspires our conversation on the show today. We’ll be talking about some fourth-quarter business matters, some taxes going to be thrown in there as well. And we welcome back to the program a special guest today. So we’re going to have Tyler Emrick on the program today, a Certified Financial Planner, key member of the True Wealth Design team.

Walter Storholt:

You may remember Tyler if you’re a long-time listener to the program. He joined us back on episode 68, and I encourage everybody to go check that one out. We got to learn a little bit about Tyler’s journey as a financial planner on that episode and explored some really cool things. So definitely go back and check that out again, episode 68, if you want to hear Tyler’s first appearance on the show. Tyler, welcome back to you. Glad you’re with us today.

Tyler Emrick:

Oh, happy to be here, Walt. Appreciate it.

Walter Storholt:

Are the elves at your house too, Tyler? We couldn’t exclude you from this conversation.

Tyler Emrick:

Yes. I am new to the elves. I have a toddler and a newborn. My wife actually called me this morning and said, “Hey, we have to do this Elf on the Shelf idea. I think it’ll be great.” I tried to order it on Amazon and we can’t get anything for another 15 days.

Walter Storholt:

Oh no!

Tyler Emrick:

“I am going to need you to stop by the store on the way home and pick one of these up.” So we’ll see, this is our first adventure into it. And I might need to get some tips from Kevin to see what we need to do here, but we are going to give it a shot.

Walter Storholt:

Fantastic. He sounds like pros already with pan-frying Sour Patch Kids and things like that. So they’re already up to lots of mischief, I’m sure they’ll be willing to share some of that with you as well. Well, Kevin, I’ll let you take it away from here. I know that this is important and something that’s near and dear to your heart, because what we’re going to be talking about today is not something that every financial advisor, or advisory practice, gets into themselves, let alone talks about it with clients and openly like we’re going to be doing on today’s show. But I know that a lot of the material that you have on tap today, so that’s really important to you and the team at True Wealth Design.

Kevin Kroskey:

Yeah, no, absolutely. And it’s really the basis I think for pretty much all the work that we do as financial professionals. I’ll call it cash flow. You think about what you live on, what you spend, and we’ve done different episodes on retiree spending, talking about how that changes over time and how that should really be fit into your financial life plan. There’s all kinds of examples where this may apply if you’re just an individual, or if you’re a business owner, all these things are it’s the heart and soul, I think, of a family’s or businesses financial management. What do you have coming in and what do you have going out?

Kevin Kroskey:

If you think about just the retirement planning process or a Retire Smarter Solution in general, after you are looking big picture understanding, the person that you’re working with and really who they are, what’s important to them, and what are some of the goals that they want to achieve, it really starts measuring what their lifestyle costs to go ahead and maintain on a daily, weekly, monthly, yearly basis. Measuring that lifestyle is a really good starting point when you’re working with somebody that’s new. Then maybe there’s some goals that are added on top of it now that there’s more time and maybe more resources that they have going into retirement.

Kevin Kroskey:

Measuring your cashflow and your lifestyle, what it’s costing is incredibly important when you’re in retirement too to make sure that the assumptions and the spending goals that you’re putting into your financial plan upfront are actually reflective of your lifestyle, and that’s true to form what you’re pulling out and what you’re spending on a fairly consistent basis. It’s not like we have so much precision in this that you’re going to spend exactly to the dollar every year. There’s going to be some years where you may be a little bit over, a little bit under, but if you’re consistently over, well, that’s a completely different financial plan.

Kevin Kroskey:

Unless you have a very well-funded plan with a lot of safety margin, a lot more in assets or resources relative to your spending, if you don’t have that then it could be a very, very… It could be a financial plan that doesn’t work and it could be a way to go broke slowly over time. So, I would think about what we’re going to talk about today in those two camps on the pre-retirement side, and then also really once you are in retirement, managing that tech smart retirement distribution plan. So what I thought today was we would just dig into that a little bit more.

Kevin Kroskey:

Tyler and I have been working together nearly for four years now. He came from a place that really didn’t get into this work, and I think he can provide some perspective on it maybe a little bit fresher than what I have, being that I’ve been doing it a lot longer. But then we can just talk through both of those sides, and just try to make it come to life, and why it’s really important. So that’s why I have Tyler on today and we’ll hear what he has to say as well.

Tyler Emrick:

Absolutely. I don’t think I could agree anymore, Kevin. I mean as I think about just financial planning in general, there’s a multitude of topics included in there. And the families that we meet with, their time is valuable, and part of our job is to really take a look and say, “Hey, what topics are going to be applicable to their situation and have the most impact and provide them the most value.” And I would agree with you. I definitely think cash flow planning, what’s coming in, what’s going out is extremely important.

Tyler Emrick:

And just as I reflect on my prior experience, I think you alluded to it a little bit here, I mean the extent of the cashflow planning, I think some advisors, it’s not nearly as much focus as what needs to be there. I think, shoot, I think if you sent a survey out to the listeners and said, “Hey, when you first started working with your financial advisor did you fill out a questionnaire, and on that questionnaire did they ask you how much you’re spending monthly?” Most everybody would check, “Yep. I did that.” And then if we had a follow-up question leading to the fact of how much time was spent, or how much advisor-directed conversation was around that number, I bet it would be pretty small. Would you agree?

Kevin Kroskey:

Oh yeah, completely. So I guess I’ll be a little bit more explicit when you think back to your work at, well, I mean, you were at Fidelity for about 10 years, and nothing against Fidelity, it was a completely different business model as you talked about in your prior episode, but if you’re going to do a financial plan projection for somebody, you probably asked them what the numbers were. And then I presume you just ended up fitting that right into any software projections without a further thought. Is that approximately right?

Tyler Emrick:

Right, absolutely. It comes back to time and placing value on certain conversations. Even if it was something that I wanted to check and verify, we just really didn’t have the time to set aside to dive into the details. It was more of a number that was given, and as I look back on it that’s a very important number.

Tyler Emrick:

I think you’ll get into, like you had mentioned, hey, how impactful can that number be as we start thinking about planning and the long runway that individuals are retired now for 20, 25, 30 years, and that spending number can have a drastic impact on the decisions that they’re going to make, especially in early retirement.

Tyler Emrick:

Not doing our due diligence as financial advisors to really spend some time talking about where that spending number comes from, and having an understanding of what it comprises, I think is a little bit of a disservice. And I think there’s a lot of value to be had, which we’ll talk a little bit more about.

Kevin Kroskey:

So here’s I guess what I would say. A lot of the clients that we work with, a lot of the people we work with, haven’t really had to worry about money for a while. That’s not to say that they’re all like mega-millionaires or something like that, but they’ve lived below their means, and it was pretty consistent that they had more money than most. Over time they worked up the pay scale and they made some more money, they invested more and maybe they’re spending increased somewhat, but not nearly as much as what their income increased. So it was this beautiful thing where if they had a budget or a spending plan or anything like that, or maybe when they were early in their career, they just didn’t have to do it anymore.

Kevin Kroskey:

Maybe they got away from it. That’s completely fine, absolutely fine to do something like that. But when you’re actually going ahead and trying to do that retirement planning, you need to figure out, “Well, how much does it really cost to live the lifestyle we’ve become accustomed to not even factoring in anything, any increases to it that we may want to do in retirement?” You have to roll up your sleeves and start measuring it. Maybe we can share a couple of stories here. I’m thinking of somebody that I know listens to the podcast regularly. And man, it was probably 2012 or ’13 that I was working on his case and we asked him, “How much are you spending?”. Paul said, “Well, here’s what I’m spending.”

Kevin Kroskey:

And then I looked at their tax return and how much they had withheld through their pay, and what have you. And then said, “Well, this is the cash that you had coming in. You’re telling me you spent that number. There’s about a $40,000 gap here.” And I called him at work because I was working on his plan to talk through this. And when I shared it with him, and Paul’s a pretty boisterous, talkative guy and enjoyable to talk to, but the phone got really quiet. It stayed quiet. And then I heard him. He said, “A $40,000 gap?!” Something to that extent. So we talked about it. There’s truly some one-time expenses that happened, but if there’s a $40,000 gap that’s a big number, obviously. And certainly a completely different financial plan.

Kevin Kroskey:

But I can think of some others. Well, let me put it in this context too. Say if you’re off by $10,000 per year in terms of spending, well, if you think about that old 4% safe withdrawal rate role, we’ve talked about that in prior episodes, some good, some bad about it. But if it’s just $10,000 per year, if you take that $10,000 and divide it by the 4% in effect that you’re going to find that you’re going to need about an extra $250,000 to go ahead and meet that increased spending of $10,000 per year, and do it consistently throughout your retirement lifetime. So for some people that maybe they have several hundred thousand dollars safety margin on their financial plan, if they’re off by 10 grand and they’re spending, probably not a big deal. I would still say it matters.

Kevin Kroskey:

It does impact some tax planning and other work that we would want to do and try to make the most out of what they have. But for a lot of people just say, “Hey, you’ve got to come up with an extra $250,000,” is just not pragmatic. It’s really, really important on that front end to go ahead and get a clear sense of this. Tyler, when you think back over the last few years now that you’ve been doing this, any stories come to mind when you’ve gone through this with somebody that’s still working, and you’re just starting to work with them and take them through the process?

Tyler Emrick:

Absolutely, especially if we maybe take the case study of someone who’s still working. I think just in general when families come and talk to us, I think it can be very hard to wrap their arms around spending. They have this goal of retirement or whatever it might be and understanding how much they can truly spend early in retirement without it impacting or jeopardizing them running out of money. I think that can be very empowering to walk through and have a good understanding of that. And really to answer that question, it all starts with having a good understanding of what’s going in and what’s coming out right now. But probably my most recent example would be a lady who I started working with about six months ago.

Tyler Emrick:

She was a few years out from retirement. As with most of the families when they start working with us, we go through a preliminary stage where we get to know each other and set proper expectations on what their concerns are and what are going to be the major topics and things that we’re going to discuss and try to accomplish if they hire us and continue to work with us. And when we went through that exercise with her, it was very much a, “Hey, I want to know if I can retire. I want to know if I’m on track, and am I doing the things that I need to within the next few years to go ahead and pull the trigger and retire,” which is a common concern, I think, to a lot of individuals that come in and meet with us, especially for the first time, or why they might start working or seeking out a financial planner.

Tyler Emrick:

She decided to hire us, and very early on in our planning, most of the time it’s our first planning meeting, we’re going through and spending is a big topic that we spend some time on. Really it’s to confirm and verify some of those numbers that were initially given to us around how much is coming in, and how much is going out. Very similar to Kevin, what you alluded to earlier. Well, we have various ways that we can back into numbers to verify how much is going out. And one of the ways that we do that is taking a look at prior-year tax returns, and back out what they have for taxes, what they have going out for some of their spending that’s going to change throughout retirement. Probably the best example there would be like a mortgage that might fall off or get paid off early in retirement. But one of those line items that we talk about is actual saving, because of course once you’re retired a lot of times you switch from saving mode to spending mode.

Tyler Emrick:

One of the saving items that she had brought up to me was a little bit per month going away for her daughter’s education. When we got onto that topic, I could just tell from our conversation that something wasn’t right, and it was a sore subject to her. So we really spent some time digging into that a bit more and come to find out that it really a big pain point for her because she didn’t feel that she could afford to help her daughter because she needed to save her money for retirement. In actuality, the school that her daughter wanted to go to that was a little bit out of her budget, a few generations of women in the family had actually gone to that school. It was very important for both her and her daughter for her daughter to have that as an opportunity. As we got to discussing it more and more, I could see that, yes, retirement’s extremely important, but this is another goal that she has that’s pretty high up there on the priority list.

Tyler Emrick:

Then as we start going through that planning process and we got a better idea of what she could afford, I mean the story does have a happy ending. Come to find out that her daughter could actually afford to go to that school and didn’t have to go to another one. And I think about a decision like that, going back to it’s hard to wrap your arms around, “Can I afford this big expense early in retirement without jeopardizing the long term?” And for her, in her case, it was something they could do. Just happy that we took the time to understand that that was important to her because that’s going to shape her daughter and the education that she’s going to get, and the people that she’s going to meet. I think it’s nice that she was able to do that.

Tyler Emrick:

I look back to my prior experience I wouldn’t have taken the time to go through spending, and what’s going in and out in that much detail to probably have that type of conversation, to understand her and her wants and needs that much. I don’t even know if, since she didn’t think it was possible, she didn’t really express it to me until we had the conversation. That’s probably my most recent one, but I just think it shows the power of taking the time to be able to go through and do it.

Kevin Kroskey:

Yeah. One, that’s a great story in terms of how, so if somebody’s listening to this and they’re thinking they’re still working, and maybe I haven’t done this yet and okay, I get it that I need to do it. I haven’t had to worry about money, I need to go ahead and measure my lifestyle and how much it costs. There’s a few different ways I would say to do it. You can do it the old school way, pull out the checkbook and not just the checkbook, just go through all the bank statements, things like that, and just literally track your spending. It’s pretty laborious, not many people are going to do that. You could use a technology solution like Mint.com, or there’s some others that are out there that will automate your spending tracking, but you still have to classify it, and clean up the data. I personally use that and have with some clients where this was an important thing to do.

Kevin Kroskey:

And the thing that we always do as well is just the tax return. If we can triangulate and just use that information to see, “Hey, here’s how much cash came in from work,” there could have been some other sources too. Maybe somebody sold a piece of property or had an inheritance, or what have you. But most people, their cash inflows are from work. Then you can back out all those expenses that you mentioned, whether it’s for saving or whether it’s for taxes or what have you, and get a good idea there. Some of that takes time, but you can start like day one with I would call it… Well, Walt, let me ask you, buddy. You have a mortgage on your house. Have you ever gone through a pre-approval process?

Walter Storholt:

We certainly have, yes.

Kevin Kroskey:

So if you don’t have all this cash flow, work, spending, measure out your lifestyle, critically important, also very time consuming, and also that’s one of the reasons why most people don’t do it even if they do have the capability to do it. But we often will just get a pre-approval number and say, “Hey, we’ve done some of this triangulating. We looked at your tax return, and we can get a guesstimate of how much it’s costing to run your lifestyle.” We’ll get some feedback from the client and go through some conversations, but we can also do almost a retirement preapproval number too. Here’s how much based on your resources, and do some basic retirement spending patterning, if you will, some expenses are going to fall off over time as you slow down, get through the go-go, slow-go and into the no-go years.

Kevin Kroskey:

Healthcare is going to keep increasing, all that sort of stuff, which we’ve talked about in detail on prior episodes. But then we can come up with a reasonable spending figure, setting aside money for healthcare, setting aside for say travel, for vehicle purchases. And then what we would call more core expenses that are going to be around as long as you are. So we can do that preapproval number, and then we can do some of that triangulation. All the while, in a preferred manner, we would just want to go ahead and probably have a couple years of good data to go ahead and measure that and make sure everything is matching up and make sure that we do have the time to do that cashflow work and truly get a good representation of what somebody’s lifestyle is costing them to run.

Kevin Kroskey:

Somebody has so much money in such a really well-funded retirement plan, again, you have much more of a margin of error, but that sort of cashflow work still is going to impact some of the tax planning work that we’re going to need to do, too. So it’s important in a different way rather than, “Hey, am I going to have enough money?” And answering that question, which is what we’ve really been talking about, having that good input into what it costs to run our lifestyle. If your plan is done really, really well, we still need to know those figures because from a tax planning standpoint, it’s important. But then also, as Tyler just relayed in his story, a lot of times people they’re not really thinking about some other things that they could do. In the case of whether it’s going to that special school, or maybe buying a second home, or helping out their kids or their grandkids in the now versus leaving a bunch of money onto them later.

Kevin Kroskey:

I mean all these things, it doesn’t matter how much money you have, it’s still very important for all those reasons and to bring it all together, and show that clarity, and walk somebody through it and give them the confidence to do these things, is incredibly impactful. So that’s all on the pre-retiree side, I guess. And I’ll at least comment on briefly, but we’re in the throes of our fourth-quarter work here actually wrapping it up. But we’re going through, so now predominantly for our retired clients we’re doing their fourth quarter, we call it their tax and investment review, or I like to call it their tax-smart distribution planning, and I just reviewed a case earlier today. It’s one of those things where the client has seven figures invested. By many accounts, you look at them and they’ve done quite well.

Kevin Kroskey:

They’ve been retired for a number of years now, but we’ve also noticed that they’ve been overspending compared to what we’ve had in plan for the last several years. And while we’ve had some very fortunate investment results and their plan looks okay, it’s definitely not sustainable. And it’s our job one to measure that, to notice like, “Hey, are there any gaps there? Here’s what we’re projecting that you’re going to be spending. Here’s what you’re actually spending and okay, what happened? Let’s talk about it.” Not that we’re making a judgment, but we just need to understand, and if we need to change the financial plan to make it reflective of a new reality, then we need to do that. But there’s been in their case, I think, there’s been some health issues, and really just helping one of their children.

Kevin Kroskey:

But it’s really important for us to know that because if that, and it’s about $10,000 a year on average that we’re seeing, again, that’s a completely different financial plan and one that’s not sustainable. So if we weren’t giving them that feedback as they’re veering off course a little bit, it’s a lot easier to make a small course correction rather than make a big drastic one later down the road if you’re driving down the road blind. So, that’s maybe one recent example. Some others, it could be more tax focus. So I can think of a number of people this year with all the different stimulus checks, and Cares Act and American Rescue Plan and all this, there’s a lot of planning that we’ve done over the last year just to go ahead and help get these credits if it made sense.

Kevin Kroskey:

For many clients we basically had an income target, call it $180,000 where they would go ahead and realize some income generally whether it’s pension, social security, maybe some IRA distributions, and then to meet all their lifestyle goals, and then if they still had some excess there we would go ahead and convert some dollars from their IRA to their Roth up to that income target. And that $180,000 I mentioned for a married couple, if they’re over 65 they’re not getting any Medicare income-related adjustments, they’re paying tax at a 22% rate, which is cheaper than what they were paying a few years ago and what they’re likely to pay in the future. So it was just good, smart planning, but that American Rescue Plan that came out, I think it was, I don’t know, February or March, if your income was over $150,000 then you quickly benefit of $1,400 per person was phased out.

Kevin Kroskey:

So, if you think about 180 was our original target, we bumped some people down to 150, so a $30,000 difference. And if they do that, then they’re able to go ahead and claim an additional $1,400 per person, or $2,800 in total on their tax return come 2022 when they file. If I convert that into the way that we think about it anyway, we’re big believers in doing the math, but I mentioned in that case, they’re in a 22% tax bracket. If we took them up to $180,000, basically it pushes them up over 31% because going from 150 to 180, $30,000 of income, and they pay tax at a 22% rate and they lose a $2,800 tax credit. So when you factor in both of those, their effective tax rate on the additional 30,000 of income is literally like a little bit north of 31%.

Kevin Kroskey:

We didn’t like that. We made a course correction midyear after this plan was announced, and we trued it up in the fourth quarter and did a little lower conversion. And now we got a new plan next year. So it’s really important on the front end, it’s really important on the back end. You’ve got to integrate this stuff with the tax planning as well, but cash flow, it’s boring. Don’t say budget. Budget’s like a four-letter word. We have a rule at True Wealth: never say budget in a client meeting unless they say it first. But it’s their money. It’s our job to make sure that we just help them make the most out of it, and make sure that they can keep doing the things that they want to do as best they can.

Tyler Emrick:

Walter, I know I’m a newbie here, but I was expecting my first “Egghead Alert” there. I don’t know how he got through all that without a little bit of an alert here.

Walter Storholt:

He was able to save it with the budget joke, but we can play it just since you’re on the show if you want to. That’s not a difficult thing to do. Hey, oh, there it is.

Speaker 5:

Egghead Alert.

Tyler Emrick:

If he didn’t earn it, I get it, I know. I’ll defer to your expertise there, but I think there’s a lot of important things that Kevin talked about there. And I know there were a lot of numbers there, but as I think about probably one of the major questions that as families come in to meet with us, it’s like, “I’m in retirement. Where am I going to get a paycheck from? How am I going to live? I have all these different accounts. How do I come up with some type of game plan that’s not only going to be tax-efficient, but meet my needs on a month in and month out basis?” And let’s be real, not everybody spends money the same way.

Tyler Emrick:

Sometimes there’s big expenses to come out throughout the year. So how do we build that and build a plan that fits and works, and do it in a way that’s simplistic and works for each of the different households that we’re in. I think if anybody’s working with a financial planner as you’re doing some of that next year planning and spending, well, the building in these income targets and some buffers, and “Hey, where’s going to be the first place we’re going to get money from?” Maybe that’s a monthly distribution from your IRA account, okay. For big expenses that we have coming up for say travel or whatever, “Hey, I know I can just email my advisor and get a distribution from IRA to cover this expense.”

Tyler Emrick:

So, that’s where that’s coming from. And then, oh wait, at the end of the year if we’ve underspent, or we have more room to take additional income because it makes sense from a tax standpoint, well, “Hey, what’s that number look like? And how do we want to do it?” I think it’s such an impactful thing that we do on a day in and day out basis that I think some advisors, again, don’t have the time to do or might set up a game plan at the beginning and it’s the same one year after year. And there’s no flexibility built in there.

Kevin Kroskey:

Ty, awesome point. The one other thing I’ll add onto that that just made me think of this, but for our higher-income clients with a lot of money, say in a joint account or trust account (non-retirement account), we’ll set up, these… We’re projecting cash flow, not only measuring what happened this year but also looking forward to next year. And we look and say, “Okay, here’s what it’s going to cost to run your lifestyle. Here’s the goals that you have next year, and then here’s our income target.” So if our income target is maybe a little bit higher, then we basically come up with a budget where we want to realize additional income and it could be in the form of Roth conversions. It could also be in the form of realizing capital gains.

Kevin Kroskey:

Investment markets have done quite well this year and the last several years, and so clients, they may be getting out of balance, and we may ideally need to sell something to go ahead and bring their portfolio back in line. And there’s an old saying when it comes to investment planning: “Don’t let the tax tail wag the investment dog.” But what we’ll do is we’ll set up these budgets in the fourth quarter for next year, and then literally when we go through our trading workflow to go ahead and manage a client’s portfolio and their retirement distribution plan throughout the year, we’re looking at that. If we need to make a sell, we’ll look at our capital gains budget. And if we fully use that capital gains budget or that income budget, I should say, then we’ll take a look and rework the client’s plan midyear.

Kevin Kroskey:

Like, “Hey, do we want to go ahead and maybe go a little bit further? Is the investment benefit likely to be better and exceed any sort of tax costs going over our income target?” So I know we’re getting in the weeds a little bit here, and this is into some of the sausage-making, but it doesn’t matter if you have a few hundred thousand dollars and you’re just trying to make sure that you stay on track and don’t overspend, and don’t underspend for that matter. Or you have a few million dollars and you’re not really worried about necessarily having enough, but just really making sure that you’re being smart with your money, integrating it, and aligning it to what you want to do, but then also paying your fair share in tax, but not leaving a tip necessarily.

Kevin Kroskey:

So there’s a lot that goes into it. Way more than I would’ve ever imagined before I started down this path. But hopefully talking through it at least sheds a little bit of light about some of the things that should be being done by somebody, whether it’s yourself, and even for the most sophisticated DIYer I think you’ve got to be a little bit humble here when you come to this stuff. Or your advisor, or the things that we do for our clients.

Walter Storholt:

I love the perspective that you guys bring each week. Well you Kevin each week, and now Tyler joining us on the show for his second appearance. And I would just like to say you must feel really comfortable, Tyler, and I’m glad that we have fostered that environment here on the show for you, to call for the egghead alert in appearance number two. You must be very comfortable. So, that’s fantastic.

Tyler Emrick:

I didn’t know if it was going to be too quick, but hey, I figured I’d throw it out there.

Walter Storholt:

We can throw it out as much as you want. So there we go. If you have questions about something you’ve heard on today’s show or a previous episode of Retire Smarter, and you want to talk with Kevin, Tyler, or a member of the True Wealth team, very easy to make that happen. You can give them a call if you’d like that way, 855, TWD plan, 855-893-7526. Or you can find us online at truewealthdesign.com and look for Are We Right For You button, and you can schedule a 15-minute call with an experienced financial advisor on the True Wealth team that way. And we’ll put a link to that in the description, or the show notes section of today’s program as well.

Walter Storholt:

Again, you can also just go to truewealthdesign.com to sign up for that visit, ask some initial questions, and see if it might be worth talking a little bit further about your situation and what you’re interested in going forward in regards to your financial plan. Tyler, thank you so much for taking the time out to join us on the program today. Good luck with the Elf on the Shelf over the next couple of weeks, and I’m sure we’ll be having you on more episodes soon.

Tyler Emrick:

Thank you. Happy to be on.

Walter Storholt:

Kevin, as always, thank you for sharing what’s going on in your household. Those elves sound like they’ll be up to no good over the next couple of weeks, and hope you have some fun with that. Your kids are hitting that perfect age now where I’m sure you’re getting really good payoff for all the effort you’re putting into the elves.

Kevin Kroskey:

Yeah, well, and I owe literally all the credit to my wife. She’s a great mom and she does a lot for the girls, and she deserves all the credit quite frankly.

Walter Storholt:

Fun to use the creativity in that way. Very neat. All right. Well, thank you for joining us on the show today. Thank you for listening. And we will talk to everybody next time right back here on Retire Smarter.

Disclaimer:

Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references are historical, and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.