Tax Terrors? Sleep Like a Baby with This.

A simple way investors can manage the risk associated with tax rates to potentially maximize retirement savings. 

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Chapters

• 1:26 Types of Risk
• 2:58 Standard Deviation
• 4:25 Taxes
• 5:37 IRAs
• 8:50 Takeaways

Transcript

Hey, everyone, and welcome back.
Today we're diving into something I think is pretty crucial
for planning out your retirement,
which is how to use this idea of tax risk
when you're making investment decisions.
Yeah, yeah, it's definitely something
people don't always think about.
We're talking about planning for a future where
even how much you owe in taxes can be unpredictable.
For sure, and the stuff you send over
uses a really interesting analogy
to kind of get this point across.
So imagine like planning a trip, right?
Down the Amazon, it sounds awesome.
Right, beautiful, but you don't know
what you're going to run into.
So many unknowns.
Totally, you got the dense jungle.
You got all these hidden dangers.
You never know what's lurking around the bend.
And that unpredictability is a lot like what we face
when we're planning for retirement, right?
You might have this solid investment strategy,
but just like those unexpected detours on a trip,
you know, market downturns or taxikes,
they can really mess things up.
Yeah, it's true.
And like we wouldn't just like, you know,
go down the Amazon without preparing, right?
We can't approach retirement planning that way either.
Exactly.
So how does this material we have today
suggest we should think about this?
Well, it starts by breaking down like a really key concept.
Yeah.
Understanding all the different types of risks
that investors face.
Okay, let's unpack that a little.
What kinds of risks are we even talking about here?
So one of the biggest ones is how much investment returns
go up and down, volatility rate.
And not all investments are going to be the same.
Some are like a wild roller coaster ride.
And others are more like a calm train journey
to get this across, to illustrate this point.
Yeah.
The material uses this really clever analogy
comparing investments to different kinds of bosses.
I love a good analogy.
Right.
So tell me more about these bosses.
Okay, so think of it like this, boss A.
Okay.
So this is your classic stock market investment.
Uh-huh.
Full of potential.
Okay.
Capable of like amazing returns, free lunch for the whole office.
But just as easily throws curveballs and makes you work
lead into the night.
Right.
Right.
So it's high risk, high reward.
Yeah.
High risk high reward sounds a lot like the stock market itself.
Exactly.
Exactly.
So who's boss B?
Boss B is like your bond investment.
Predictable, reliable, maybe not as flashy.
Right.
Safe pair of hands, they might not be giving out free lunch
every day.
Yeah.
But you can always count on them for like a steady, predictable
work day.
Gotcha.
So boss A is like that unpredictable, maybe potentially high
growth.
Yeah.
And boss B is more of that stable, maybe lower growth, but
exactly.
You know, more stable.
And understanding these different like personalities, so to
speak, it's so key for building a diversified portfolio,
right?
Yeah.
You know, risk tolerance in your retirement goals, but there's
another really important concept that this whole analogy helps
explain.
Okay.
It's standard deviation.
Standard deviation.
It sounds a little intimidating.
I'm not going to lie.
Yeah.
Maybe it sounds technical.
Yeah.
But it's honestly pretty straightforward.
Think of it like like measuring those mood swings.
Okay.
Like we were talking about with the bosses.
Yeah.
How much does boss A's, you know, demeanor actually change?
Right.
Is it like a minor shift?
Uh huh.
Are we talking like Dr. Jekyll and Mr. Hyde levels of
unpredictability?
Okay.
I think I'm starting to get.
So like a high standard deviation basically means more
volatility.
Yeah.
Right?
Like more potential for those big wins, but also big losses.
Exactly.
Okay.
Just like putting a number on that risk.
Huh.
Now imagine trying to figure out how much you'll have for
retirement when your investments are like all over the
place.
Right.
Up and down constantly.
Yeah.
That's what you think is so important.
Okay.
Because it helps you make smarter choices about how much
risk you're actually okay with.
Right.
Especially as you get closer and closer to retirement.
Exactly.
Yeah.
That makes a lot of sense.
But I think you said there's kind of another layer of risk
that we need to be thinking about too.
Right.
Yeah.
And this is where it gets even more interesting.
Okay.
So the material we're looking at says that even if you like
perfectly pick your investments and manage your risk and
everything.
There's something else that can still mess things up.
Okay.
What is it?
Taxes.
Taxes.
All right.
Yeah.
I figured they'd come for me eventually.
Of course.
I just didn't realize I had to plan for them.
Like now.
Yeah.
That's what a lot of people don't realize.
I mean.
We spend so much time thinking they're growing our money.
Yeah.
But we kind of forget that the government's going to want their
share eventually.
Right.
Right.
Yeah.
For sure.
And what makes taxes even more complicated is that those
rates can change a lot over time.
Oh, right.
Yeah.
So it's not even just how much money I'm making.
It's how much I actually get to keep at the end of the day
after taxes.
Exactly.
Okay.
And that's what this tax risk thing really means.
That's exactly it.
Like the uncertainty of what future tax policies will be.
Right.
And how they might impact you when you're retired.
Okay.
What happens if like taxes go way up by the time you retire?
Oh gosh.
Yeah.
I didn't even think about that.
Suddenly that comfortable retirement fund doesn't look so
great anymore, right?
No.
Not at all.
But this is really making me rethink how I need to be
planning.
Yeah.
That's a whole other level.
So how do we deal with this tax risk thing?
What does this material say we should do?
So it suggests you should diversify your taxes when planning
for retirement.
Hold on.
What diversifying for taxes?
Yeah.
Just like you would diversify like with your investments.
Okay.
It's all about having a mix of accounts that have different
tax treatments.
Okay.
The material talks specifically about two main types.
Okay.
Tax-free accounts, which is like Roth IRAs.
Okay.
And tax deferred accounts, which is like traditional IRAs.
Okay.
You know about those, right?
I've heard of them.
I was going to mixed up, though.
Yeah.
It's really common, Dory.
Okay.
So basically with a Roth IRA, you put in money that you've
already paid taxes on.
Okay.
So after tax money.
Exactly.
You pay those taxes now.
But then when you take money out in a retirement, you don't
know anymore taxes.
So it's like I'm saying, okay, whatever the tax rate is
right now, I'm locking that in for later.
Exactly.
Even if it goes up in the future.
That's the idea.
Wow, that's kind of cool.
Okay.
Right.
What about the traditional IRA?
So that one's basically the opposite.
Okay.
You might get a tax deduction now.
Okay.
Which could be a really good thing.
Yeah.
But you're going to pay taxes on that money when you retire.
So you're pushing that tax burden back.
Exactly.
Okay.
Hoping it'll be lower then.
But like we said, there's no guarantee.
Right.
No one can predict the future.
Okay.
And that's exactly why having both types of these accounts
is so powerful.
Okay.
I see what you mean.
You're basically protecting yourself from whatever happened.
Heaging your bets, right?
Exactly.
Okay.
So if taxes are like super low when I retire,
I could take out more money from that traditional IRA, right?
Right.
Take advantage of that low rate.
Yeah.
And if they're super high, then I have that Roth where I don't
have to worry about it.
Exactly.
You've got it.
It's about having choices, you know?
Yeah, for sure.
I like it.
And staying in control no matter what happens with taxes later on.
That makes me feel better already just hearing that.
And the best part is that you can change things up as you need to.
Okay.
You know, we can't predict the future.
Right.
But you can be as prepared as possible.
Yeah.
I like that a lot.
Okay.
This is seriously making me rethink how I've been approaching
all this retirement planning stuff.
Yeah.
It definitely makes you think.
It really does.
And the best part for me is I feel like now that we're talking about this,
I can actually like do something about it, you know?
Right.
That's all point.
It's not just like, oh, well, I hope for the best with taxes later,
like we're actually taking control.
Exactly.
And the sooner the better, right?
Yeah.
For sure.
For sure.
It's like, we were so busy figuring out that river of investments,
we totally forgot about the jungle around it.
Not like that.
And that jungle is taxes.
That's a good way to put it.
But like, with the right tools, the right knowledge, you can handle it.
Okay.
So this deep dive, I feel like has been really, really helpful for me.
Thank you for explaining everything so clearly.
You did it.
Before we wrap up, is there anything else that we should keep in mind
with this whole tax risk idea?
Yeah.
So one really interesting thing the material touches on is that
we were talking about like the US tax system, right?
Right.
Yeah, of course.
But other countries do things totally differently when it comes
to retirement and taxes.
Of the headroom.
That's true.
So it might be worth looking at how those other countries do.
Well, that's interesting.
See if we can learn anything.
Yeah.
Compare notes.
Exactly.
You never know what you might find.
That's a great point.
That's definitely going on my list of things to check out.
Okay.
So it sounds like the main takeaway here is just be prepared, be flexible,
and don't be afraid to adjust your plan along the way.
Exactly.
You said it better than I could.
Awesome.
Well, this has been super helpful.
Thank you again for walking us through all of this today.
Anytime glad I could help.
And to everyone listening, thanks for joining us for this deep dive
on taxes and retirement planning.
We'll see you next time.