Over the past couple months we’ve seen inflation hit a 40 year high at over 8% and with interest rates steadily on the rise, a lot of us have started to wonder what we should do when it comes to our retirement portfolios. Understanding the new laws and legislation being put into place and what strategies you have to further secure your portfolio is becoming crucially important in this constantly changing market. To help you navigate these new laws and changes in the economy, our founder Pam Krueger sits down with Erik Olson, CFP®, an expert financial advisor on the Wealthramp Network to discuss how you should be approaching this new market and key considerations for your ongoing retirement investment strategy.

Discussion Recording Transcript

Pam Krueger:

Hi everybody. I'm Pam Krueger, the founder of wealthramp.com. And I'm also the co-host of Friends Talk Money, the podcast that's on PBS Next Avenue. For anybody who doesn't know, Wealthramp is the place where you come when you're looking for the right financial advisor. These are advisors who work only and directly for you, not as sales reps at brokerage firms or for insurance companies. So when you do want an advisor and you want to know that that advisor is legally bound 100% of the time to look out for your best interests as a fiduciary, you come to Wealthramp as your go to.

Well, welcome to our Wealthbuilder series. You asked if you could hear from our advisors every now and again. So once a month, I take one hot topic and I go into a deeper dive and hear from one of our experts, which also allows you a chance to get to know that expert. Today's interview is titled Ready, Set, Retire. Really? Because what I want to focus on today, especially in this environment, is the feeling of retirement security, financial security.

So we're going to talk a little bit, just for a quick second, about what you probably have been reading about with this Secure Act 2.0 legislation. And we're going to just talk about the major things that might impact your 401k or your individual retirement account that should help us all save a little bit more. And we're going to look at some of the most popular strategies and considerations around IRAs and 401k accounts, around retirement savings, and also touch upon how these strategies might be changing and adjusting in an era of rising inflation.

So I want to introduce to you our featured guest today. Erik Olson is a certified financial planner and a retirement strategist. Erik's going to walk us through these topics that we're going to touch on. He's with Arete Wealth Management, which is located in Chicago. Let me tell you, because I've known Erik for quite a while, when I say that he has an expansive research background and he is very analytical. He helps his clients grow and protect their money in challenging market environments, especially when they're constantly changing. And he's just one of 240 advisors in the Wealthramp network, and he is accessible to you. Welcome, Erik. Thanks a lot for taking the time today.

Erik Olson:

Yeah, Pam. Thanks so much for having me. You highlighted the analytical part. I did, just to let you know, and our listeners know, I did take the plastic pocket protector off. I did take the tape off the glasses. And I'm not wearing the calculator on the belt today. So I just wanted to be just much more accessible to your listeners.

Pam Krueger:

I just really like you the way you are. Don't go changing for us. Erik, let's just set the stage a little bit because so many people have been reading about this Secure legislation, this 2.0. And I don't want to get into the weeds and talk about, well, what if? But I do kind of want to focus on the things that could change. Because the house passed Secure 2.0, It’ll now head to the Senate. It is a supplemental bill to that Secure Bill that was passed back in 2019, which had a lot of bipartisan support. What do people need to know that can help them the most with this new piece of legislation?

Erik Olson:

I guess I'd put it this way. The things to look forward to, and just in quick succession here, would be number one, a much bigger opportunity to have contributions, particularly catch up contributions as well as matching contributions from your employer, be directed into the tax free part of your plan, as opposed to every dollar going into the pre-tax part. That's potentially huge. Another is that if they push the age at which you're required to take minimum distributions from the IRA from 72 to 73, 74, all the way out to 75 over the course of a decade, that'll also have really big planning implications. For some people, that'll be a big advantage. For some that could potentially be consequential. If you want to talk about that in another episode in the future, we can talk about the pros and cons of that. But I think those are two of the biggest changes. The third, maybe for those that are really big charitable givers, there's relaxed constraints on charitable giving from your IRAs and 401ks.

Pam Krueger:

No, that's excellent. So when we talk about pushing it over to tax free, what we're talking about is that the catch up provisions can be directed into the Roth way of saving?

Erik Olson:

The Roth component of your plan, correct.

Pam Krueger:

The Roth component, which we love. Okay. So at the same time, I want to kind of have you walk us through, I think you have about six considerations that you think that people need to be looking at in succession right now. Again, we're focused on retirement security and feeling more secure throughout your retirement. So I'll just let you go ahead and delineate the six considerations.

Erik Olson:

Sure. These tie in with this broad question of am I going to be okay? Many planners, and much self planning, is focused on merely one question within this, is there enough money saved? It's a sufficiency directed analysis. And that's fine. And everyone needs that. I'm not disparaging that at all. What I would say is that it needs to go beyond that because if you can move from a mere sufficiency analysis to then augment that with an efficiency analysis, you can usually find resources in tax avoidance over the full arc of your retirement. That can mean the sufficiency question is answered differently and more favorably for you.

Pam Krueger:

OK. So if I translate that, what I'm hearing you say is that tax focused planning in retirement is critical because we're all worried about having enough. What you're saying is, that's fine, but have your eye on the ball for tax efficiencies and strategies that can be deployed, which can really help you keep more of your nest egg from going to taxes. Okay, so what's number two?

Erik Olson:

Well, so that's the framework. But within that framework, and people who are saying, "Okay, Erik, you're saying we should be looking at efficiency, not just sufficiency. How do we go about that?" I would say step number one is to do some sort of life expectancy analysis. I will say 5, 10, 15 years from now they'll have blood tests that will get us a lot closer on this. But for now even, there are some instruments that have been validated over large population samples that can get you closer than just looking at the broad life expectancy tables.

Pam Krueger:

Am I going to take that to mean that I'm going to find out the date of my death ahead of time?

Erik Olson:

Well not necessarily, but you'll find a range. And if that range gets you closer, especially if you're, let's say, planning as a couple, and now there are two life expectancies that are taken into consideration. Let's use my wife and I for example. What if she winds up living to 100, I wind up living to 80? The outcomes of the financial plan that uses those as the life expectancy assumptions is almost certainly going to be very different than the plan that uses a life expectancy assumption that's reversed or that's in the middle. So what I advocate for our clients is that we look at that planning process using a variety of life expectancy, short, long, and in between for both of them so that we can see whether or not there are any vulnerabilities in there. That's a very different set of outcomes sometimes than just saying, oh, well, I'll hedge against the possibility of long life. And I'll use a 95 or 100 for everyone.

So life expectancy assessment, I think, is a starting point. Second is nailing it on the guaranteed income, including social security and having the optimal social security claiming strategy. For some people, that optimal strategy will be waiting, each of them, until they're 70. But oftentimes it's not. And so, without getting into the weeds on that, getting that right is important too.

Pam Krueger:

I think at Redwood there's something like 8,500 permutations of claiming strategies. But I appreciate you pointing that out because obviously your social security strategy and your timing on it interplays with your health, financial plan and investment strategy. So that's very important and needs to be considered very carefully.

Erik Olson:

And incidentally, that is life and expectancy dependent as well. So that's why you want to have those two working together. The third and the fourth though, start to really get into the topic that you had started out with, we've got this exciting world of tax deferred, tax free accounts that we're using to stash away funds for the future. And then how do we access those in the wisest way to have the most that we are able to spend, and the least unnecessarily handed off to the IRS? Well, I would say three and four in this series of six things go hand in hand, but they're conceptually separate.

First, should I do Roth conversions? What do I mean by a Roth conversion? That means in a year, taking X number of dollars out of my IRA and placing it directly into my Roth IRA, paying taxes on it in the year in which I make that conversion. Oftentimes we can identify instances in our lives where we can foresee years we'll have very little competing income and hence will be in a relatively lower tax bracket than we will be in other years. That's an important caveat to consider and all else being equal, a wonderful time to look at possible Roth conversions.

The fourth thing though, which goes right along with that is, what's the best way to pull money from my various accounts? For example, if I have half my money in 401ks and IRAs, a third of it in taxable accounts, and a sixth of it in Roth IRAs or whatever the balance is, and it's going to vary from every single person, should I drain one, then go to the next, drain it, then go to the third? Should I do a mix and match? Should I do a mix and match, and then go to a draining strategy? Start with a draining strategy and then go mix and match? What should I do?

Pam Krueger:

Erik, Let me just ask you one quick question here with regard to Roth IRA conversions, because a lot of people make too much money.. Their income is too high to contribute to a Roth IRA. There's such a thing as a backdoor Roth that wealthier Americans can use. And the reason it's called backdoor is it's kind of a workaround where a person can actually fund a traditional IRA, or non deductible IRA, I should say, and then immediately convert that to a Roth IRA. Which means they will not have to pay taxes down the road. So for a minute there, it looked like that was possibly going to go on the chopping block, but it appears that the backdoor Roth IRA is still a viable strategy right now for wealthy people.

Erik Olson:

Yes. So let's put this in context. So by far the most powerful way to move assets from a pre-tax 401k or a pre-tax IRA into a Roth is through the conversion process. And that's available to both those with the highest to lowest income, and the highest to lowest assets. But if we do want to talk about it, is there another way on top of a conversion that you can use to get money into that tax-free category? Yes. For those that have been disqualified by virtue of their income from making any contributions to a Roth IRA, they can contribute on an after tax basis to the pre-tax traditional IRA, and then transfer that over to the Roth. And since they contributed originally to the pretax IRA on an after tax basis, then moving that portion over to the Roth, they don't have to pay taxes on that.

The problem with that is that those conversions are done on a pro-rata basis. And so if you said, I've already got a million in my IRA, I put in 5,000 or 6,000 this year, and then I want to do a conversion of, let's say, that same $5,000 or $6,000, only a tiny fraction of that, because it's done on a proportionate basis, would then be done on an after tax basis. So the mega backdoor Roth is the thing that people are talking about even more than that. And that is where you have the contribution to not only the after tax contribution, but to the profit sharing part by the employer on your behalf, so you can make that contribution on an after tax basis. That part can be selectively moved over to the Roth side without having to do it on that pro-rata basis. So that's a powerful approach to consider.

Pam Krueger:

So this reminds me of the story that we've all heard. For all you billionaires out there who don't already know this, or have an advisor advising you. This is where the PayPal founder, the spotlight went on Peter Thiel because I think he had something like $5 billion at one point in time from his company for his Roth IRA, which would've been ostensibly is not going to have to pay taxes. So the mega IRA is for the billionaires. The backdoor Roth IRA and the regular IRA's for the people who are mostly your clients. I mean, your clients are mainly people who are saving and investing anywhere from a half million to 10 million, 20 million. But you'd certainly work with a fair number of people who I would say are probably half million to a million and million and a half to two million in total savings.

Erik Olson:

Right. And I would say, sit down with your advisor or your tax advisor, one or the other, and figure out how to go about it. I do think the backdoor Roth IRA, we use that a lot and we use the mega backdoor Roth IRA on occasion. But I would say that it's overwhelming, the conversion process we use, there are ways to make this happen. Secure good counsel, and you can make it happen in a way that you'll be really happy about down the road.

Pam Krueger:

Okay. Erik, what's number four?

Erik Olson:

Number four is then to, as I was saying, to optimize where you pull the money from. And you cannot answer that question by simply asking, should I pull it again from the IRA, the Roth IRA, the taxable account? Should I do some of each? That's a really individualized analysis, and it depends on a lot of factors. But it goes hand in hand with the question of Roth conversions. If you have zero money in tax free accounts, then your answers to that optimal withdrawal strategy will differ than if you do Roth conversions. And whether you should do Roth conversions will also differ on the composition and your answers to the optimal withdrawal strategy. So they're inseparable. But it's a powerful, powerful technique used in conjunction with one another to make more of your wealth spendable by you and less of it owed to the IRS.

Pam Krueger:

Right. Okay. I was just going to say, these four so far, everything makes sense because it's all in conjunction with decisions that you have to be making. And I love the fact that you're calling these considerations. Because if anyone's taking notes, these are the things to just be mindful of. Okay. Sorry. So number five?

Erik Olson:

No, this is fine. This is great. Number five is the question of how do I? Everyone's familiar, I think, with the concept of asset allocation. In other words, let's say I'm a moderate investor, hence I should have X amount in stocks of various kinds and X amount over here in bonds of various kinds and what have you. Everyone's familiar with that pie chart analysis of how to diversify your portfolio.

But a second consideration is what I'll call, not asset allocation, but asset location. In this question, what you're asking is, okay, let's say I have more than one kind of wealth, meaning, from a tax standpoint, more than just an IRA. I also have possibly some taxable assets, or because I did some conversions, I have some Roth assets. If I've got more than one type of asset, should I build my moderate portfolio identically in each of those three tax categories, or should I have that portion of my portfolio that's in my tax deferred IRAs look different than the amount or the framework that I used for my taxable accounts, and hence also for the Roth?

And most people say, "Hmmm, never really thought about that." You'd be surprised a lot of advisors have never even thought about that, which always puzzles me. So if I were to ask you, Pam, if you could pick one of those three buckets, tax deferred, tax free or taxable, that you would want to see grow the most over your lifetime, which would that be?

Pam Krueger:

Well, the inclination is to say the tax free.

Erik Olson:

You're right.

Pam Krueger:

Anything that would be in my Roth. That would be what I would presume.

Erik Olson:

All else being equal, I think most people would agree with that. So then, if you're a moderate investor, why would you put any of your slow growing stuff over in your Roth? Instead you'd probably put more of the high growth tax inefficient things in my Roth, the slower growing tax inefficient things in my IRA, and the remaining tax efficient things in my taxable account.

Pam Krueger:

Absolutely. Yeah. That makes perfect sense. And then a lot of people have real estate as well, and they have cash flows from real estate. But these days, people have rental properties and other assets as well. So that's an asset location. What’s the sixth consideration?

Erik Olson:

All of the first five have been very, I would say, objective questions that are objectively answered. This last one is a more subjective question, and this is really about understanding your personality, spending and what changes may arise. But it does have an impact on how we answer many of the other questions. And the question is what does the future have in store for us? Of course, none of us knows what the next 30 or 40, 50 years, what hand life will deal us. And none of us know, particularly what hand the overall economy and markets will deal us. We don't know if we're going to have disproportionately many years of high inflation or low, or in between. Disproportionately many years of high returns or low.

Pam Krueger:

Yeah. We can't predict and we can't control.

Erik Olson:

So if we run into the buzzsaw of too many years of high inflation and low returns, that's going to mean that whatever sufficiency questions that we might have answered in general are probably going to be overestimating what we'll actually have. But the opposite also could be true. Some people say, "I want to guard against the worst case." That's fine. I'm not in any way suggesting you shouldn't. But there are other people that would say, you know what? I don't necessarily want to pre-assume that we're going to run into that worst case environment. I would rather let time play out and unfold, and show us what kind of hand we've been dealt. And then, if it turns out that we're getting more than our fair share of poor returns, high inflation, then I'll make adjustments.

Pam Krueger:

Right. But Erik, I know that some people are very, very good at using their own spreadsheets, if you will. I mean, my brother was like that. And he was really good at it. And he was an engineer. And I think that most people who are coming to me, Wealthramp, and that watch my show on PBS, they're really saying, "This is complicated. There's a lot of moving pieces and parts.” And what I'm hearing from you, out of all six considerations, is whether you're doing it on your own, or whether you do hit the call for help button, it's really important that you have a sense that financial planning is not a rear view mirror. Financial planning is dynamic, not static. It's not just right now, in the present only.

The only way I can think of the way you just described point number six is to plan it out a little bit ahead, so you can stress test. I'm a believer in stress testing different scenarios. And so right now, we've got some headwinds. We've got inflation, we've got rising interest rates. We know that there's pressure on anybody who has a bond portfolio that has a typical bond that might be 10 years out. You're going to see the prices and the value of those already, I think going down right now, of course. We're going to see interest rates continue to rise because the Fed has not made it secret, whereas they used to be very secretive about these things. And now they're just wide open saying, "They're coming. We're going to raise rates even more."

So in terms of looking at where most of our 401K and IRA money is invested in the stock market, it’s in a broad portfolio like an index fund or ETFs that represent the whole market. So, I'm not just betting on one horse, I'm betting on the whole horse race by owning the entire market. Talk to me a little bit about how you plan for the future, using all of the six considerations, and factoring in inflation and the possibility of maybe some headwinds on certain companies whose profits might impact the overall performance of the overall stock market in a negative way going forward, if interest rates are rising.

Erik Olson:

Great. So there's two ways that we approach those challenges with our clients. One is on the planning side, and it includes those six things that we just talked about. But it is, as you said, stress testing the portfolio. What happens if, fill in the blank, this stressor is introduced, whether that's market drops or higher than normal inflation or any number of other possible stresses.

Pam Krueger:

Could be your health. It could be your spouse's health. Yeah.

Erik Olson:

Absolutely. The second response though, is to talk about the composition of the portfolio and whether or not, on some tactical level, it makes sense to make tilts in the composition of the portfolio that respond to the unfolding circumstance in front of us. So for example, on the bond side, you've already pointed it out. Because of interest rates, the federal reserve has announced, "We're going to be raising these rates." There's no secret about that. And what you're seeing is that the bond market is responding as you would expect it would, with declining prices for bonds. Listeners understand, I think that interest rates and prices of bonds are inverse. So if you raise interest rates, the response will be a decline in the pricing of those bonds.

Pam Krueger:

Otherwise known as, you will see the value of your bonds go down just like a stock goes down in price. And that will not feel good.

Erik Olson:

So holding things to maturity, if you own the bonds outright, you'll still get the outcome that you banked on, barring any sort of credit default, you'll still get the outcome that you thought. But if you're investing in a bond fund or bond ETF or something of this kind, you should expect that the price response will be in the face of that decline. And that's what we've been seeing. Similarly, on the stock side, if you see the interest rates rising, then the value of anything that is predicated on future cash flows, those increased interest rates then necessarily imply that you should use a different discounting factor for future cash flows.

Pam Krueger:

And so, in other words, it gets factored into the price of the stock today.

Erik Olson:

In a zero inflation, zero interest rate environment, a dollar 10 years from now is worth a dollar today. But if you say, in an environment of 8% inflation or 3% interest rates, that dollar 10 years from now isn't worth a dollar today. And so the more those interest rates rise or that inflation factors in, the less we value that dollar 10 years from now. Hence stocks, namely in the growth category, that are predicated largely on their future cash flows, not their present ones have been suffering in this environment just as we would expect.

So on the investment side, we're talking with clients about the role that value based investing as opposed to growth investing can play in their portfolios, despite the dominance of growth over the last decade. We're talking with them about the role of potentially commodities or at least commodity based businesses. We're talking with them about a variety of approaches on the bond side that are alternatives to bonds. There are many things to consider. And of course, I don't want to make any sort of one size fits all prescription for listeners., but I do want to say that it's useful to think about how to tactically introduce tilts into the portfolio in response to some of these unfolding considerations.

Pam Krueger:

And what you're describing are tweaks and adjustments. And we're talking to people who may never have had an advisor like you, I mean, who really gets into this and really gets into the details at a granular level. And for people who are, that half million dollar nest egg or that million dollar nest egg, really concerned that they don't outlive their savings. I think to really summarize everything you're saying is, the six considerations that you laid out, in combination with understanding that everything we're saying sounds so darn complicated, but when you really put it into buckets and you look at these six considerations, you kind of tick them off as, yeah, they're very practical.

And if you've already been doing a lot of rebalancing and you're already doing this yourself and doing it well, then yeah, maybe it is just tilting and tweaking or doing that with your advisor. But also understanding that if you are doing it yourself and you haven't been doing any of this, I think the thing that I would be thinking about, maybe you agree, is this is a really good time because you may have money that's in bond funds that you might not be happy with in another six months to a year. Like, if you're not happy today, you might be even less happy as interest rates increase if you're hanging onto those. And it is a good time to just review all of these tax focused strategies in combination with your investments and your plans on withdrawing money out when you retire.

And of course, the biggest point Erik is, especially for people who are 67 and are thinking that they are going to retire soon, now is a good moment to stop and reassess all of it. With all these things that have to do with the economy and things we can't control like inflation, interest rates and other geopolitical tensions, it might be longevity that becomes the biggest threat to our retirement. We might just find ourselves living into our nineties, and maybe beyond that. I see it more and more with my friends, with their parents. They're living these long lives, hopefully healthy. But that is just a huge consideration to think about when you're planning for retirement.

Erik Olson:

Pam, you're talking about longevity. And I think it's important for our listeners to just understand. A baby born in the United States back in 1900 had a life expectancy at birth of 47. A baby born a hundred years later, in 2000, had a life expectancy at birth of 77. A 30 year expansion. You think about all of human history, and in that 100 year period of time you had an elongation of the life expectancy at birth of 30 years. Now, that's different from life expectancy at 65. But that process hasn't stopped. There are ongoing breakthroughs being made in genetics and biotech and so forth. I fully expect that within, hard to put a number on it, but I'll say babies born within 20 years, many of them will have life expectancy stretching well into their hundreds. And so with that changing landscape, all of us have some thinking to do.

Pam Krueger:

Yeah, how am I going to take care of my older self? I don't want to be in my nineties and run out of money. So my point is, all joking aside, it is just a huge piece of the question because we can't stop ourselves from thinking, oh, 65, we're going to retire. And then you're talking another 30, maybe 35, years that you're going to coast off of your savings. So I think the timing of bringing in that question right now, given changes in the economy and considerations we have to have about what it's really going to take to be able to stretch that money out for the rest of our lives is huge.

Erik Olson:

You're so right, Pam. I think in the final analysis, the way I would just characterize it is, this is the single biggest financial liability that people will have to fund in their entire lifetime. It's not their home, it's however many other years they spend beyond earning a paycheck. There's so much, I would say, importance on getting these decisions right. So I would just strongly encourage listeners, if you're not working with an advisor, to talk to a number of advisors. Don't just say, hey, the first one we met was nice. Let's work with that advisor. Instead, talk to a few advisors and find out how their brain works, what their process is and exactly what sorts of things they'll examine. You deserve to have these things examined for you. And I really would say, no one should be without this.

Pam Krueger:

And when it comes to calling for help, I always try to counsel people, "Stop. Take your time. This decision has to be so thoughtful because everything's at stake right now. Your whole life savings are at stake. This decision has consequences. Who I'm going to rely on to guide me into retirement is everything." So that's why I feel so strongly, obviously, about fiduciary and about fee only, and full transparency, and having the competency and the background, the qualifications.

And Erik, I'm going to wrap on that because you bring that. And I'm not just saying that because you're here. I have talked to you so many times and I've gotten to know you, and I know the clients who have already gotten to know you. And I'm very fortunate that you're part of our network. And I appreciate you. And we'll have you back again to talk about another topic. But you've given us a lot to think about with the six considerations, and then also the focus on longevity, because that's a big deal.

So I just want to say, thank you so much. This is Wealthramp Wealth Builders. We do this every month. And I promise you, I'm going to email you ahead of time for next month's video, so you can join us live if you want to, and ask questions directly of the expert that we're interviewing. Or if you're shy, you can just email your questions in to us ahead of time and request a topic and we'll talk about it.

You can reach Erik, because he is one of our 240 advisors in our Wealthramp network that I've hand selected. But you can ask all these questions at askpam@wealthramp.com. And you'll find Erik at Arete Wealth Management in Chicago. Thank you so much, Erik.

---

Finding the right financial advisor can be challenging. Let Wealthramp help you find the right advisor who will help you with your personal financial needs and situation.