Good Debt vs Bad Debt


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Transcript

Mike:

If you want to either retire or just maybe keep working because you want to, not because you have to, you absolutely must have a plan in place to deal with that debt and your retirement accounts, when you’re retired, also known as taxes. What is your plan? What are you doing to take over control of the debt on your retirement accounts? Instead of just sitting there and letting the IRS do its thing.

Zach:

This is retirement today, I’m your cohost, Zach Holcomb, and alongside me, we have Michael Reese certified financial planner, retirement planning, expert, and founder, and president of Centennial Advisors. Today’s show is all about the questions that you have to answer, if you want to make work optional. And our last segment, we talked about the amount of income you need to generate to step away from your job and make work optional. But now I know you’re really excited about this discussion, Mike, we’re talking about taxes.

Mike:

Oh yeah. You know, I love taxes or maybe we could say, I have this love, hate relationship with taxes.

Zach:

Yes. On both sides of the spectrum. It’s like a lot of love and a lot of hate.

Mike:

I hate the fact that we pay a ridiculous amount of tax because our federal government are a bunch of morons and they can’t balance a checkbook. Right. And they have no desire to, they’re like a bunch of freaking teenage kids with their first credit card and mommy and daddy are happy to pay all the bills. So I hate that. In fact, I’m, I’m going to get my face red and go crazy. What I love on the other hand, I love putting together strategies to help people legitimately and legally pay less tax. So that’s, that’s I like that. That’s fun. I love that.

Zach:

Let’s talk about some of those.

Mike:

So that’s what I want to talk about here is if you want work to be optional, then you need to know, you need to decide how are you going to manage your tax liability in retirement?

Mike:

So I kind of, in the first segment a little bit earlier in the show, we talked a little bit about a couple I was talking to in the office the other day they had, it was like 1.3, 1.4 million in their 401k. And so let’s imagine, I mean, think about yourself. I mean, you, you might have more than that in your 401k. You might have less than that. I, you know, it doesn’t really matter. Here’s what matters, what matters is, you know, when you have this money in your 401k, you know, you look at your statement, so this couple let’s call them. I gotta come up with a new name. I so want to say Fred and Wilma Flintstone. I’m not allowed to because of copyright or something. So maybe I’ll go with let’s say a hypothetical couple named Barney and Betty.

Zach:

Ok gotcha, never heard of them,

Mike:

Never heard of them, and they are not related to Fred and Wilma at all, but we’re going with Barney and Betty. And let’s imagine that Barney and Betty have they come to see me or someone, you know, one of the advisors on the team here and they say, Hey, I’m looking to make work optional. I want to retire potentially. And I want to structure my finances in a way that makes sense. And one of the things we’re worried about our taxes and they bring their statements, they say, oh, look, here’s 1.3 million in a 401k, right. Or maybe some in Barney’s name, some in Betty’s name, but yet it all up 1.3 million. And if you notice on their statements, it says Barney 800,000. And then I’m Betty statement, it says Betty 500,000 or maybe the other way around, whatever. Right? But you add it up, it’s 1.3 and it’s their names on the statement.

Mike:

And I had the conversation. I said, you know, do you guys own a home? They said, yeah, we have a home. What’s the value of that home? Well, here we are in Austin. A Year ago, it was worth 500, but I think it’s worth 800 right now if we sell.

Zach:

Inching up to a million,

Mike:

Because the price of real estate has gone crazy. So I’m like, fair enough, whatever. It’s call it worth 800,000. Huh? Do you owe anything? And they said, yeah, I think we owe about 230,000. I said, great. Let me ask you a couple of questions about that home loan first. Is it like one of these variable rate contracts or is it a fixed like a 30 year mortgage fixed rate? What, what, what do you, what do you have? Oh, Mike, we have actually we refinanced recently because rates were so low, we actually have a 15 year fixed rate.

Mike:

Wow. It’s fixed it like 2% or something for the next 15 years. Oh, that’s fantastic. So I said, okay, so here’s what I’m hearing you tell me. Your mortgage is 230. It’s at 15 years, roughly 2% a year. Your payments are same. The rates say nothing changes. Is that correct? Yup. That’s how it works. Are you sure? That’s how it works. I mean like, could the bank come to you and say, you know what? I know that you owe us 230,000 on your $800,000 house, but he, you know what, we we’ve decided. We don’t like that. And we think we’re going to increase how much you owe us. You now owe us 300,000 on the house, not 230. Could your bank do that?

Zach:

No,

Mike:

Of course not. Well, could they maybe change the interest rate? Because they just feel like, you know, we set this deal up with you at 2% for 15 years, this isn’t really working out for us.

Mike:

Can the bank change the rate, maybe change the length of the loan. Can they do any of that?

Zach:

No,

Mike:

No, they can’t. Of course they can’t. Right? I mean, it is what it is. Unless you decide to make a change. It’s 15 years. It’s 2% and you’re just going to pay it down during that time. Right. And they’re like, yeah, that’s it. So $800,000 house, $230,000 loan. This is set in stone. So what we could say is with your home, we would say that that would represent debt that is stable and that you control. Yes, you are the one in charge. You are, you’re in control of that debt. You pay it. You could pay it off early if you want, but it’s not going to get bigger unless you choose to make it bigger. The rates, the nothing changes unless you choose to change it.

Mike:

Is that a fair statement?

Zach:

That’s fair.

Mike:

And Barney and Betty, our fictional couple who are not related to Fred and Wilma Flintstone. They say, yeah, that’s exactly the case, Mike. I said, great. Let’s compare that to your 401k where you’ve got 1.3 million between you. And right now I know it only says your name on these accounts. So just like your name is on your house, which is worth 800,000. Now your name is on these accounts. They’re like 1.3 million, but here’s the deal. You’ve got debt. Just like you’ve debt on your house. You’ve got debt on this 401k. But the difference is with your house, the debt is linked to a bank. With your 401k, it’s linked to the IRS. Every time you pull money out of there, the IRS, they’re going to take a chunk. Right. But here’s the difference with your bank? Who controls the debt with your bank?

Mike:

So what did we say, Barney. Betty, you control the debt. In other words, it doesn’t change unless you choose to change it. What about the debt that the IRS has in the form of taxes, on your 401k? Who controls that?

Zach:

Not Barney and Betty.

Mike:

Yeah. Do you control it?

Zach:

Nope.

Mike:

No. Who controls it?

Zach:

IRS.

Mike:

Yeah. The IRS or more specifically the bozos in Washington, DC, who don’t know how to balance a checkbook, control that debt. And unlike a bank who actually has to balance, you know, their accounts, the bozos and DC don’t. And so if they’ve decided, oh, we’ve decided to spend a bunch of money and we, oh, we don’t have enough money to pay for it. What can they do? With the stroke of a pen they can raise taxes. They’re talking about it right now. And the minute they raise taxes, as you like to say, Zach, boom, what happens to the debt on your 401k? The minute they raised taxes?

Zach:

Skyrocketing

Mike:

It goes up, it goes up, you don’t control the debt. It’s kind of like the bank on your house deciding, oh, your loans 230, Hey, we’ve changed our mind. Let’s make it 300. That’s what it’s like. So the question you have to ask yourself is, is if you want work to be optional, if you want to either retire or just maybe keep working because you want to, not because you have to, you absolutely must have a plan in place to deal with that debt and your retirement accounts. When you’re retired, also known as taxes, what is your plan? What are you doing to take over control of the debt on your retirement accounts instead of just sitting there and letting the IRS do its thing. And whether you use Roth conversions or maybe move money to insurance, we might talk about that a little bit later. Also tax-free if you do it right, it doesn’t really matter. What matters is, what’s your plan? What are you doing? And that, by the way, it brings up, Hey, I want to make sure I let you guys know this. As you’re listening, you might be sitting there saying, man, I want work to be optional, but in order to really make work optional, you have to make intelligent, smart, well thought out financial decisions.

Zach:

Hi, and thanks for checking out retirement today. If you like the content we share on our channel, make sure to like comment and subscribe. So you can say notified about all of our latest content and videos. Be sure to share all of our information with your friends and family as well. Thanks for joining us. We’ll see you next time.

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