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Financial Advice

Mike Piper: Financial Considerations for People Who Have Enough

How having sufficient assets for one’s own lifetime affects decision-making for investments, charitable giving, estate planning, and taxes.

The Long View podcast with hosts Christine Benz and Jeff Ptak.

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Our guest on the podcast today is Mike Piper. He is the author of several personal finance books, the latest of which is called More Than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need. Other books include, After the Death of Your Spouse; Can I Retire?; Social Security Made Simple; Taxes Made Simple; and Investing Made Simple. Mike also writes a wonderful blog called Oblivious Investor, and he has developed a free tool for exploring Social Security-claiming decisions. It’s called Open Social Security. Mike is a certified public accountant.

Background & Books

Bio

Oblivious Investor

Open Social Security

Mike Piper: Delaying Social Security Not Always a Good Deal,” The Long View podcast, Morningstar.com, April 27, 2021.

More Than Enough: A Brief Guide to Questions That Arise After Realizing You Have More Than You Need

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

Can I Retire?

Social Security Made Simple

Taxes Made Simple

Investing Made Simple

Tax Strategies

How Much Can I Give Per Year Without Having to Pay Tax?” by Mike Piper, obliviousinvestor.com.

401(k) Rollover: Where, Why, and How,” by Mike Piper, obliviousinvestor.com.

Tax Planning Begins When Building Your Portfolio. Here’s What to Know,” by Kate Dore, cnbc.com, June 7, 2022.

Roth Conversion Planning: A Step-by-Step Approach,” by Mike Piper, obliviousinvestor.com, July 5, 2021.

Social Security

Social Security Strategies for Married Couples,” by Mike Piper, obliviousinvestor.com, Jan. 1, 2020.

The Three Biggest Social Security Misconceptions,” by Mike Piper, obliviousinvestor.com, April 11, 2022.

Charitable Giving

Deduction Bunching: Tax Planning Strategy for Charitable Giving,” by Mike Piper, obliviousinvestor.com, Jan. 1, 2022.

What’s the Point of a Donor-Advised Funds?” by Mike Piper, obliviousinvestor.com, Feb. 28, 2022.

Qualified Charitable Distributions (QCDs): How Do They Work, and Are They the Best Option for Charitable Giving?” by Mike Piper, obliviousinvestor.com, Nov. 22, 2021.

Asset Allocation

Calculator for Backtesting a Portfolio or Asset Allocation (Also Monte Carlo Simulations),” by Mike Piper, obliviousinvestor.com, Sept. 12, 2022.

How Much Cash Should a Retirement Savings Portfolio Include?” by Mike Piper, obliviousinvestor.com, Aug. 16, 2021.

Simplifying a Retirement Bucket Portfolio,” by Mike Piper, obliviousinvestor.com, July 8, 2019.

Other

Personal Representative vs. Trustee: What’s the Difference?” by Mike Piper, obliviousinvestor.com, May 22, 2023.

Transcript

(Please stay tuned for important disclosure information at the conclusion of this episode.)

Jeff Ptak: Hi, and welcome to The Long View. I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Ptak: Our guest on the podcast today is Mike Piper. He is the author of several personal finance books, the latest of which is called More Than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More than You Need. Other books include, After the Death of Your Spouse, Can I Retire?; Social Security Made Simple, Taxes Made Simple, and Investing Made Simple. Mike also writes a wonderful blog called Oblivious Investor, which is at obliviousinvestor.com, and he has developed a free tool for exploring Social Security-claiming decisions. It’s called Open Social Security. Mike is a certified public accountant.

Mike, welcome back to The Long View.

Mike Piper: Thank you. I’m happy to be here.

Ptak: Really happy to have you back on the podcast. Wanted to start with your book. Your book is geared toward people who have determined that they have “enough.” But how can people make a sober assessment of whether they have enough in the first place? Are there any heuristics that you would recommend?

Piper: That’s admittedly a bit of a tricky question, because obviously, there’s all the research, including Morningstar’s research, on safe spending rates. What’s often assumed in a lot of that research is that you’re going to be spending at a steady amount or a steady level from the portfolio over time. Whereas, of course, just for a lot of real-life households, what ends up happening is that you retire and there’s a window of time where you’re spending from the portfolio at a higher rate because Social Security hasn’t started yet. And then, Social Security kicks in and spending from the portfolio declines. And your tax situation changes, so your expenses are changing over time. So, it’s a little bit complicated in a real-life situation.

I still think, though, that the general rules of thumb that for any part of the portfolio that you expect to be spending from this part of the portfolio pretty much indefinitely through your retirement, I think those general 3% to 4% ranges still makes sense as a good heuristic, as you said. Typically, I would say that the younger you are and the lower the interest rates are, the more we want to be looking at that 3% figure, and the further you are into retirement and the higher the inflation-adjusted interest rates are, the more that 4% figure seems to be more applicable.

Benz: In the book, you note that that 3% to 4% initial spending rate is sort of battle-tested. It’s meant to be there for worst-case scenarios. But from a practical standpoint, many people end up underspending at that level. Can you walk us through that?

Piper: There’s a few reasons why we need to use those low 3% to 4% figures. Reason number one is that we obviously don’t know what investment returns we’re going to get. We have to plan for mediocre to poor investment returns. Reason number two is that we don’t know how long we’re going to live. So, you can’t just plan to run out of money exactly when you reach your life expectancy because there’s a 50% chance roughly that you live past your life expectancy. And no matter how old you get, that’s always true. You always have whatever remaining life expectancy, and you have to be planning for a longer period of time than now.

And then, the third reason, and this is actually another one, sometimes it’s a complicating factor that gets left out in some of the retirement spending research is that spending isn’t entirely within our control. Imagine that you have a spending strategy that you’ve decided on that this year it calls for spending, let’s say, 4% from your portfolio. But this year you receive a cancer diagnosis, let’s say. And so, your doctor is saying you need the surgery and then you’re going to need chemo. Nobody in their right mind is going to say, nope, sorry, I’ll wait on that until next year, because that would mean spending 6% this year, and I’m not going to do that. You’re going to spend 6%, or you’re going to spend 7%, or you’re going to spend whatever it costs to do that. That’s what everybody is going to do.

And then, there’s also other things. You need a new roof on your house or something like that. There’s basically just the fact that spending is somewhat outside of our control. So, we need to use this low base level of spending to give yourself some wiggle room, so to speak. But what usually ends up happening? You’re basically creating a plan that will work even if you live to a very advanced age, even if you have really high medical expenses, and even if your portfolio returns are really poor, you’re creating a plan that still works in all of those cases. But of course, you’re probably not going to get unlucky in all of those ways. You’re probably going to have reasonable investment returns and you probably won’t live to age 105 in a nursing home is how I say it. And so, what usually ends up happening is that on the day you retire, you had enough, meaning enough to make it work at this low spending rate, but the normal course of things, if you don’t get super unlucky, is that enough ultimately becomes more than enough. Meaning that there’s going to be a significant chunk of money left over at the end of life. And in fact, in a lot of cases, if you’ve run Monte Carlo simulations and so on, you’ll see that at these low spending rates in the median outcome, there’s actually—in a lot of cases, it depends on what assumptions you use and so on—but in many cases, the median outcome actually results in a larger portfolio balance at death than on the date the person retired.

Ptak: We wanted to expand on that over the course of the remainder of the conversation. In the book, you discuss some of the psychological barriers people face with respect to giving money away, which is the situation they’re in in the median cases you’ve just laid out, or even spending it on themselves as it were. You work with clients directly on financial plans for their retirements. Have you encountered that, where people actively underspend relative to what they could spend because they’re afraid?

Piper: Sure. I encounter it all the time. Do you want to know what my suggestions are?

Ptak: I do, yes, if you could offer those.

Piper: I think there’s a few reasons that a person might be feeling that way, that they might be having that experience. I think sometimes it’s just natural personality. The character traits that led a person to accumulate a large sum of money, it might be that they’re an anxious person who is typically nervous about the future. And so, they were throughout their career making a point to save, save, save, save at a high rate because they’re nervous about the future. And now that they’re retired, they just still have that same personality trait. They’re still nervous about the future. So, they’re still feeling the same way even though the actual financial reality of their situation is different. So, it’s not really a surprise that people often feel that way.

I think there’s a few things you can do if the goal is to work on, let’s say, becoming more comfortable with spending more for yourself. You can take a research-based approach. There’s a considerable amount of research on the topics of what types of spending are most likely to result in an increase in your happiness. Because the point here isn’t just to spend more for the sake of spending more. The point is, if you’re going to increase your spending, it’s to do it in a way that’s going to make you happier, actually, meaningfully improve your quality of life.

And the two biggest things that I’ve seen coming out of research on those topics are that, number one—and you’ve probably encountered this research before—is that spending on experiences rather than spending on physical things tends to result in a greater increase in happiness. And conclusion number two is that spending that in some way strengthens existing social connections or helps you develop new social connections also tends to result in a significant increase in happiness. And that’s particularly relevant in retirement scenarios because what really happens, unfortunately often, is that on the date that somebody retires, they lose a lot of social connections that they’ve had with co-workers and so on over many years. So, we actually see an increase in depression and anxiety coinciding with the early stage of retirement, and that’s a part of the reason why. So, any spending that can help you strengthen social connections is likely to be some of the best spending you can do.

So, to me, the obvious thing here to do is check off both of those boxes, meaning any spending that you can do that is an experience with loved ones is probably the best spending that you can do in your life really in terms of the likelihood that it will increase your happiness. So, that could be travel with family, paying for a vacation with the kids or grandkids or whoever it is, a good friend. Or it could be any sort of classes with a friend or guided experiences—architecture tours and things like that—or depending on where you live or what kind of things are into, paying a guide to take you and your partner or a sibling or some other loved one on an adventurous hike or something like that. So, experiences with loved ones is really the best spending in terms of spending that you can do on yourself that’s likely to increase your happiness.

As far as learning to give, be more comfortable giving, that’s a trickier one. I would say my usual suggestion to people who are looking—they realize that on an intellectual level they could afford to be giving more to either loved ones or to charity, but they still just feel anxiety around it, I’d just say start with a small amount, start with some amount that doesn’t trigger anxiety and then just see how you feel afterward. See if you felt nervous about it or if it actually made you feel good. Because usually, frankly, that’s what happens. The person ends up, they felt good about it, because that’s, again, usually what happens when you spend on other people—you feel good about it. It increases your happiness. So, start with an amount that doesn’t trigger anxiety and just go from there.

Benz: Mike, I wanted to stick with that topic of giving to loved ones. So, for people who have maybe progressed through their retirements and they’re looking at their portfolios and it looks like they’ll be more than adequate for their own spending needs, spending on loved ones, children, grandchildren would be an obvious avenue for those funds. You note in the book that a common pattern among high-earning, high-savings households is adults tend to leave a substantial sum to their children when they pass away, and the children themselves are often middle age or even older at that time. And you think that in a lot of cases that’s kind of suboptimal that people should think about giving to their children or grandchildren at a life stage when those funds might be able to have more of an impact.

Piper: I see that all the time, frankly. And I have to imagine most people who work in the financial advice field see this regularly where somebody inherits a considerable chunk of money from their parents. But at the time that they inherit it, they’re already retired. They already managed to accumulate enough assets to satisfy their desired lifestyle in retirement. So, this new chunk of money that they receive doesn’t really do anything for them in any huge meaningful way. They already have what they need. And I think that’s, by the way, just the normal course of things with the way that life expectancies work in today’s world where people often live into their 80s, sometimes 90s. So, if you think about how old a person typically is when they are having kids, that means that the kids are often going to be in their 60s. And so, they’re retired or nearing retirement. That’s just kind of the way the math works.

I think, in a lot of cases, it can make sense to work on giving earlier. And of course, it could be scary, for the reasons we talked about earlier, that with the bequests, of course, there’s no question of can I afford to give this money, because obviously you’re finished using it at that point. But with lifetime giving, it can be scary. But I guess the good news there is that with gifts made earlier on, they can be smaller amounts and still be super impactful. If your kids are in their late 20s, 30s or whatever age they’d be looking to be buying their first home, a gift that helps them make that down payment on that first home is tremendously impactful, and relative to a retiree’s portfolio that’s often not a huge percentage of it. Similar for helping the grandkids or great nieces and nephews, or whoever it is, pay for college. If they come out of school with somewhat smaller student loans, it makes their life so much easier and less stressful and less challenging. So, smaller giving amounts can be really impactful earlier in people’s lives.

Ptak: People also have a lot of incorrect assumptions about gift tax. Can you explain why most people are unlikely to ever pay it?

Piper: First, any gifts that you make to charity or to your spouse are exempt from gift tax to begin with. That’s thing number one. Point number two is that there is a $17,000 annual exclusion, meaning that you can give up to $17,000 per year to any one recipient without needing to worry about gift tax. And if you’re married, you and your spouse can each give that amount. So, something that you’ll see sometimes with higher-net-worth families who are looking to give the maximum amount to their kids. If it’s a husband and wife who are looking to do the giving and you’ve got a child who is also married, both of the spouses can give that $17,000 amount to each of the spouses. So, it’s a total of $68,000 of giving in a given year before needing to tap into your lifetime exclusion. And that lifetime exclusion, that’s point number three, reason number three why you generally aren’t going to see any gift tax needing to be paid.

When you do exceed the annual exclusion amount, what ends up happening is any amount in excess of that—we call it the taxable gift for the year—all that happens is that it gets backed out of your lifetime gift/estate exemption amount. And right now, that lifetime threshold is about $13 million per person. So, unless your total lifetime giving—and again, that’s giving in excess of this annual $17,000 exclusion—unless your total lifetime giving plus the amount you leave exceeds that threshold, then we’re not going to be having to pay any gift or estate tax during the person’s life.

Benz: Sticking with this kind of rarefied, admittedly, group, you do cover trusts in the book and discuss situations when they may be appropriate, things to bear in mind and so forth. Talk about another topic where there’s so much confusion about when to use trusts, different types of trusts. Can you talk about the situations when they would tend to be most appropriate?

Piper: Just like you said, part of the reason for the conclusion is that there are so many different types of trusts, and there are four different purposes. One reason, say, general catchall reason why a trust can be useful is, if you just want to exert some sort of control over these assets after your death. A common example is, if you have an adult disabled child, then having a trust where you’re funding the trust with your assets or perhaps you’re funding the trust with your assets upon your death, and then you appoint somebody as the trustee, whether that’s a trusted family member, a friend or a professional such as a CPA or somebody, an attorney or somebody along those lines, then those assets in the trust are for the benefit of your disabled child. So, this money is going to be used for the benefit of your child, this person you love, but the decision-making is left to somebody else, somebody who has better ability to make the investment decisions and spending decisions and so on.

Another common example is, people who are on a second marriage, for instance, and one or more of the spouses have children from a previous marriage, there can be concerns about if Spouse A dies first and just leaves all of their assets outright to Spouse B, maybe Spouse B will leave all of the combined assets to their kids rather than leaving any to Spouse A’s kids. Spouse A and Spouse B also separately, they can each create a trust, which will be funded with their own assets, and then maybe the income from those assets will go to the surviving spouse. But then, upon the surviving spouse’s death, then the remainder of the assets will go to the person’s own children. So, anytime you want to have some sort of control over assets upon your death, trusts are useful.

And then, we were just talking about gift and estate tax. They can be useful for people who are concerned that they’re going to be subject to estate tax. And what I see, frankly, most of the time, people who are subject to estate tax, it’s not actually at the federal level, because again, that exemption amount is so high that it’s more often that we’re dealing with state-level estate taxes, because often they have exemption amounts that are much, much lower, as low as $1 million rather than the federal $13 million. And so, trusts can be useful in various ways to minimize estate tax liability. If you think it might apply to you, it’s a topic that you would want to talk to an attorney in your state, because trust law, probate law, estate tax, all of these things vary by state. So, you want to be working with an attorney in your own state who knows all of your personal details as well as all of the details of state law that are relevant.

Ptak: You also talk about naming a family member to be a trustee or using a professional trustee. Can you discuss the pros and cons of each setup? It seems like anecdotally professional trustees can be pretty expensive. So, maybe you can talk about that as part of the pros and cons?

Piper: The primary pro of using a family member is exactly what you said—that professional trustees can be expensive. The other advantage of using a family member is that they know your family, they know the people involved and maybe there are some family dynamics here that are critical for the person in this role to be aware of. So, those are really the two primary advantages to using a family member.

There are, though, significant advantages in favor of using a professional. One such point is that the professional, this is their job, so they have the knowledge and expertise with regard to investment decisions and so on and just general financial decisions that perhaps your loved ones,—whatever family member you would be considering as the trustee—maybe they don’t have that knowledge. So, a professional is useful there. There’s also generally going to be oversight. If you appoint a firm, a CPA firm or a law firm or somebody as the professional trustee, then there’s going to be some sort of internal controls, basically, at least there should be in that firm to make sure that the people in this role are doing a good job of it. Whereas by comparison, if you appoint one of your kids to be the trustee for one of your other kids, there’s isn’t necessarily anyone checking in to make sure that they are fulfilling their responsibilities in an appropriate way.

Another point in favor of a professional trustee is that in many cases, appointing a family member as trustee can lead to conflict. And this depends on exactly what the circumstances are. But for instance, if one of the reasons why you created a trust is that you want to leave money to somebody who you wouldn’t trust to make their own financial decisions for one reason or another, either just because they have a history of poor financial decisions or because perhaps they’re disabled. So, appointing a trustee takes that decision-making authority out of that person’s hands. But if you’re putting that decision-making authority into a family member’s hands, that can create conflict, because the beneficiary of the trust can come to see that family member trustee as an impediment basically, the person who’s keeping them from having access to their money. And so, it can create this pretty substantial and sometimes very long-term conflict within the family that is obviously not what you really want to be happening. So, if you’re pointing a professional into that role, there might actually still be that conflict, but then that conflict is directed toward an external party rather than directed toward someone else in the family.

Benz: Yeah, that all makes sense, Mike. You have a wealth of tax-planning expertise. You’re a CPA. So, I want to talk about the types of assets that would tend to be most advantageous if I’m thinking about this kind of lifetime gifting to loved ones. Can you walk us through, say I have my assets in different silos like traditional tax-deferred, taxable, brokerage accounts, Roth assets, how I should pick and choose which assets to earmark if, rather than give cash directly, if I’ve decided to maybe give some securities?

Piper: If we’re talking about lifetime gifting, in most cases, I would say gifting cash is actually the best approach if we’re talking about gifting to a family member rather than donating to charity. Or I shouldn’t just say family member—family member or other individual who isn’t the charity. So, if we’re talking about gifting, gifting cash is often the best bet. Because if you’re gifting taxable assets that have gone down in value, that’s usually not a good idea. It would generally be preferable to sell the asset, claim the loss, and then gift the cash. And as far as gifting assets that have gone up in value, sometimes that can make a lot of sense. The primary time when that might make the most sense would be if the recipient, their income level is such that they could realize a long-term capital gain at a 0% tax rate, that might make sense. But the rules for cost basis for assets received as a gift are complicated. So, it’s important to really do your research or talk to a tax professional about it.

The other downside of gifting assets that have gone up in value is that depending on the person making the gifts, depending on how old they are and kind of health they’re in and so on, it might just be better to gift something else and then hold these assets for the remainder of their life, and then, if those same assets ultimately go to that same party later upon the original owner’s death, well, now they’ll get a step up in cost basis. And so, they won’t have to pay any tax at all. Often, if we’re talking about gifting assets during lifetime, just plain old checking account dollars are often the best dollars to use.

Ptak: You also cover charitable giving in the book, and there’s a cottage industry of firms that aim to rate the effectiveness of various charities. Are there any rating services or other tools that you especially like?

Piper: I think that’s a tricky one. I’m not necessarily a big fan of the ratings themselves, because the methodologies used are different and if you haven’t looked into what the methodologies are, you shouldn’t assume that the methodology that a particular rating service is using is a good fit for your own values and your own priorities. I do think, though, that those websites can be useful just for gathering information. Just the facts of a particular charity that you’re considering giving to, they’ll usually make the nonprofit organizations’ Form 990—that’s the tax return that they have to file—they’ll make that available, so you can review that. And then, you can also often just find information about the nonprofit in terms of what their mission statement is, what their goals are, what things they’ve achieved. It’s often the same information that you might find somewhere on the charity’s website, of course. But these other websites can be kind of a collection of that information for a whole bunch of different charities all in one place, so it can be convenient. And so, they’re useful in that sense in terms of doing research. But I wouldn’t say that if you’re considering two charities and a particular rating website gives one an A and the other one a B+, then you should definitely give to the one with an A rating because you might find that one is a better fit for you even if they’re the one with the B+ rating for one reason or another.

Benz: We want to delve into the tax implications of charitable giving. Maybe before we get into some specific strategies, can you just give us the lay of the land? The typical person who is under 70.5 doesn’t have a lot of avenues for earning any sort of tax benefit for charitable giving. Can you talk about why that is?

Piper: The big thing is that the primary tax benefit that you would get for people under 70.5 from charitable giving is the itemized deduction for charitable contributions. And these days with the standard deduction being much larger than it was several years ago, there just aren’t as many people itemizing. And if you’re not itemizing, well, then the itemized deduction that you’re getting isn’t actually giving you any tax savings.

There’s two points here, though, that might let you get some tax savings. Number one is the deduction-bunching strategy. And this isn’t just about charitable contributions, but charitable contributions are one of the most easy ways to apply this strategy. And that is basically trying to lump a whole bunch of years’ worth of itemized deductions into one single year and just basically doing that every several years. So, for instance, instead of donating X dollars every single year, donate 5 times X dollars every fifth year. And so, every fifth year, you get one really big, itemized deduction and that will exceed your standard deduction, so you get some big tax savings that year, and then, in the other four years, you use the standard deduction. So, that’s one strategy that you can use.

Another way to get some tax savings in one sense, it’s not a deduction if you aren’t itemizing. But if you’re donating appreciated taxable securities, so shares of stock or mutual funds, for instance, that are in a taxable account, they’ve gone up in value since you bought them and you’ve held them for longer than one year, then when you donate those, you do get an itemized deduction equal to the current market value. But again, if you’re not itemizing, that doesn’t actually save you any money on taxes. But the other upside is that you don’t have to pay tax on any of that appreciation, whereas if you use those dollars for spending—if you just sold that mutual fund and used those dollars to pay your groceries for a given month, then you would be paying tax on that capital gain. So, donating appreciated securities can be another tax-advantaged way to do charitable giving prior to age 70.5 and then, at 70.5, you have another big strategy that becomes available.

Ptak: How do donor-advised funds fit in for people who are charitably inclined? It’s hard to argue with the convenience, but the fees cut into the amount the charity actually receives. Can you share any strategies to help mitigate the cost headwind that people would otherwise experience?

Piper: A donor-advised fund—I think an important thing to understand about them—a lot of people miss this is that they don’t actually offer any tax benefit. They offer significant administrative benefits, but no tax benefit. And what I mean by that is that any tax savings that you get from donating to a donor-advised fund, you would get that same tax benefit from just donating to the ultimate charity. They do, however, though, like I said, provide some administrative benefits. So, one of those benefits is that you can make the financial decision now, the tax-planning decision now, like we’re going to donate X number of dollars this year; put it into the donor-advised fund, you get your itemized deduction; and then, you can figure out later how and when you’re going to allocate those dollars to the ultimate charities. And that can be helpful, especially for the deduction-bunching strategy that we were just talking about where, let’s say, every five years you make one big contribution to the donor-advised fund and then you allocate it out over those five years to your favorite charity or charities.

But just like you said, Jeff, they do have costs. Donor-advised funds charge usually an asset-based fee. So, I think, the general way to minimize that fee is simply not to keep a lot of money in the fund for a very extended period of time. Don’t use this as an asset-accumulation vehicle. Rather, funnel money through the fund and then in a reasonably prompt way to the ultimate charities is essentially what I would usually recommend doing with it.

Benz: Thank you. That’s helpful. I want to go back to qualified charitable distribution because we took it off the table because it only applies to a certain subset of our population, people who are over 70.5. But you really like the QCD. It seems like everyone involved in tax planning likes the QCD. Can you talk about what it is and how it might be useful in this context, especially thinking about older adults who are looking at their portfolios and saying, I have more than enough to last and I’m also charitably inclined?

Piper: Exactly. So, a QCD, qualified charitable distribution, is for anybody who has reached 70.5. And I always do specify that it still is 70.5. Because it used to be the same age as when RMDs kicked in. But the recent legislation that has now twice bumped up the RMD age, it did not bump up the age for QCDs. So, you still get access to those at age 70.5. And the way that this works is that basically you have money distributed directly from your traditional IRA to a nonprofit organization. And a key point here is that it has to be a traditional IRA. It can’t be a 401(k) or 403(b) or some other sort of tax-deferred account.

And when you do this, when you have a qualified charitable distribution made from your traditional IRA directly to a nonprofit organization, what happens is two things. Number one is that the amount distributed is completely excluded from your gross income from the year. And number two is that the amount distributed, as this QCD, counts toward your RMD for the year. So, basically, this can be a way to satisfy your RMD without actually incurring any taxes. So, if you’re considering doing any giving anyway, this is just such a good way to do it because you’re satisfying your RMD, you’re giving to the charity, you don’t have to pay any tax. The charity itself is tax-exempt. So, even though they’re getting money from a traditional IRA, which would be taxable to any individual human being, the charity doesn’t have to pay tax on it either. So, it’s super-duper tax-efficient.

Another important point here, another thing that makes QCDs particularly tax-efficient is that, just like we were talking about a minute ago, when you donate taxable dollars, checking account money, or you donate appreciated securities to a nonprofit, what you get in that case is an itemized deduction, which might not actually give you any tax savings if you’re using a standard deduction. Whereas here with the QCD, the distribution is completely excluded from your taxable income. So, you can use the qualified charitable distribution in a given year and use the standard deduction in that same year.

Ptak: If people want to earmark parts of their portfolio to pass to charity after their deaths, which accounts will tend to be the most advantageous from a tax standpoint?

Piper: For any giving that you want to do to a charity as a bequest, again, similarly to QCDs, taxes for dollars are the best dollars to use for that hands down. And the reason for that is that any tax-deferred dollars that you leave to an individual, to a person, they’re going to have to pay tax on it. So, an individual would much rather receive Roth dollars or taxable account dollars where they’re going to get a step up in cost basis, they would much rather receive those than a tax-deferred account. Whereas the charity is perfectly happy to receive the tax-deferred account because again they’re tax-exempt, they don’t have to pay tax on it. So, tax-deferred dollars are the best, most tax-efficient dollars to leave to charity as a bequest.

Benz: I want to talk about asset allocation. We haven’t really talked about how this portfolio should be positioned for someone who is looking at their assets and saying that they have more than enough. So, there are a couple of schools of thought on this. You’ve got the Bill Bernstein model where his famous saying is, “If you’ve won the game, quit playing.” On the other hand, people with substantial financial resources are better equipped to absorb losses, so they might seem better equipped to take on risk in their portfolios. How do you suggest people approach that decision-making?

Piper: I think the most important question is to first determine—that Bill Bernstein saying, “If you’ve won the game, then quit playing”—if you’ve won the game, but if you could then lose the game, if things go poorly from here, then you want to use—just like he says, quit playing—you want to use a safe portfolio, whatever that looks like. Maybe it’s a TIPS ladder, deferring Social Security and so on. We always talk about that because that provides a very safe source of income. But you want to be doing things that improve your safety. If you’ve already reached the point where not only have you “won the game,” but also, even if investment returns are really, really unfavorable, you’ll still be just fine. In that case then you don’t need to use a super-safe portfolio. You still could because you don’t need very high investment returns, so no need to take on risk, but you also don’t have any need to avoid risk either. So, essentially, for somebody in that situation, either approach—you can take a very aggressive allocation, you can use a very conservative allocation, or anywhere in between can really make sense. It just depends on what you want to do—like would it stress you out to have a volatile portfolio? Then you can perfectly afford to have the low expected returns that come from a very safe portfolio. But if it wouldn’t stress you out, it doesn’t put your finances at risk and you like the idea of just maximizing the amount that you would be expected to leave to your loved ones or to charity, or whoever it is, then a very aggressive allocation could make sense and anywhere in between is fine too, really.

Benz: Do you think mental accounting, like a healthy form of mental accounting, can be helpful in this context where if someone has the overage portfolio—which are funds that they don’t expect to spend during their lifetimes—could they silo it in some way, segregate it from their spendable assets to just make it easier to asset-allocate each of those portfolios and then also to give themselves permission to spend from their own retirement assets?

Piper: Yeah. I think mental accounting, it can be helpful. Just like you said, it could help you give yourself permission to spend. I think that could be a good idea. I’ll also note that sometimes with mental accounting, we want to make sure that it doesn’t get in the way of any other goals. If mental accounting, you’ve mentally segregated two different chunks out of your portfolio, subportfolio A and subportfolio B, but for a particular tax-planning reason, in some future year, it makes sense to use part of portfolio B to satisfy goal A, well then, you should forget about the mental accounting for a minute. Just go ahead and do that. But yeah, if it gives yourself permission to spend, sure. Or if it makes you feel more comfortable using a risk-heavy portfolio for the money that you’re intending to leave to your kids, and that’s your goal, then, sure, I think it can make sense.

Ptak: Wanted to turn to tax strategies if we could. You’re a CPA and tax expert. It’s a good bet that one of the top questions you receive is whether to convert traditional IRA assets to Roth. What are the key questions someone should ask when pondering that decision?

Piper: This is literally the most common question I receive hands down. There’s a lot going on here. It could definitely be a full episode all on its own. But some of the high-level concepts—point number one, when you make a Roth conversion, you are paying tax now so that you can avoid paying tax later. So, you want to ask what tax rate would I be paying right now and how does that compare to the tax rate that would be paid on these dollars later whenever they come out of the account later if I don’t convert them right now? And there’s a bunch of complicating factors here, things you need to keep in mind.

Complicating factor number one is that your marginal tax rate, whether we’re talking about the tax rate you would pay now on a conversion or the tax rate that would be paid on these dollars later, it’s not necessarily the same thing as just tax bracket, because there’s a million different things in our tax code where some additional amount of income causes the normal amount of income tax based on your tax bracket, but it also causes something else to happen as well. For instance, it causes a particular deduction or a particular credit to start to phase out. So, your actual marginal tax rate through a particular range could be much higher than just your tax bracket. So, that’s complicating factor number one.

Complicating factor number two that you want to make sure to remember is that future tax rate, it might not be your future tax rate. And if this money or a significant chunk of it is ultimately likely to be left to your kids, then it would be the tax rate that they would pay. And remember that with current tax law, they probably will have to distribute any tax-deferred account over 10 years. So, relatively quickly, meaning that the distributions themselves might potentially bump this beneficiary up into a higher tax-rate zone. Or conversely, if the money is expected to go to charity upon your death, well, then that future tax rate is zero, which actually makes Roth conversions look really unappealing. Because why would you pay tax now in order to avoid a 0% tax rate later? That doesn’t make any sense.

Another complicating factor that it’s important to remember for a married couple is that there is very likely to be a period of several years where only one of the two of you is still alive. And the reason that’s important here is that a surviving spouse will be filing as single, probably, and so they only have the standard deduction that’s half as large as a married couple filing jointly, and their tax brackets will each have half as much space in them as they do for a married couple filing jointly. But the surviving spouse will generally have much more than half as much income because it’s the smaller of the two Social Security benefits that goes away and the portfolio is still there doing what it does, providing the same amount of income that it did while both people were still alive. So, the surviving spouse has half the standard deduction and half as much space in the tax bracket, but more than half as much income. And so, the result is that they often have a higher tax rate.

So, the takeaway here is that for a married couple, it can sometimes make sense to be doing Roth conversions while both people are still alive because they recognize that there’s likely to be a period later in life, during which only one of them is still alive and that surviving spouse is likely to have higher tax rate. Overall, this is just topic number one with regard to Roth conversions, is that you’re paying tax now instead of later, and there’s a bunch of complicating factors that go into that.

Another important point about Roth conversions is that they reduce your RMDs later. And here, we’re not talking about the fact that we’re avoiding that tax later because that kind of falls into point number one that we’re already talking about. But instead, what we’re talking about here is that if you’re in a situation where you won’t have to be spending your full RMD every single year, then any money that you take out as an RMD, which you don’t spend, that you’re going to be reinvesting it in a taxable account, which means that going forward there’s going to be tax drag, there’s going to be an ongoing cost because you have to pay tax on an interest and dividends and so on. And so, conversions can help you minimize that future tax drag because the money would be in a Roth account instead of a taxable account. And then, there’s some other factors as well. I don’t know how deep you want to get into this, but using taxable dollars to pay the tax on a conversion basically is letting you buy more retirement account space, which can be advantageous. Also, if there’s an estate tax, doing conversions just reduces the total number of dollars in the estate, which can be advantageous. So, there’s some other big factors to consider as well.

Benz: Thanks, Mike. That’s helpful. And I agree it is a whole episode unto itself. In our last remaining time, I’m hoping to spend a little bit of time on a book that you wrote, another of your very helpful books. It’s geared toward people who have lost a spouse, and it’s called After the Death of Your Spouse. It focuses on the specific steps that surviving spouses should take after the death of their partner. So, you work with individuals and families directly. I’m sure some of them are at this life stage. Are there any jobs that come up following the death of a spouse that people tend to find surprising, or they find really onerous?

Piper: Yes. I think the primary thing that people find surprising is just how much there is to do. It’s not necessarily that any one individual thing is particularly terrible. It’s just that there’s so much. And that’s really why I wrote that book is because this is a time in a person’s life where they’re going through what is probably the hardest experience they’ve ever gone through emotionally, or at least one of the hardest, and then, right at that moment, they have this tremendous administrative burden just dropped in their lap at a time when they’re probably least capable of dealing with it. And so, the book is basically just to try to give a person step-by-step, these are the things you need to do right now, these are things you can do a little bit later. And one of the big things is really just you have to notify a whole bunch of different entities about your spouse’s death—insurance companies; if they’re receiving a pension, you’ll have to notify them; Social Security Administration—basically, anywhere where your spouse had a financial account, you have to let them know. Things that were titled in your spouse’s name—for instance, between the two of you, if [there was] joint ownership, basically where the title is automatically going to transfer to you in one way or another, you need to notify wherever that title is held so that they can update it appropriately. So, there’s just a lot of different administrative things that you have to do. And it’s not that any one of them is particularly terrible. It’s just that there’s so much and you don’t want to forget any of the pieces.

Ptak: For older adults, one thing that doesn’t seem to get much attention is that income coming into the household may drop because of Social Security benefits being reduced after the first partner dies. Can you discuss that as well as the implications for retirement planning in that situation?

Piper: Generally, if we’re ignoring complicating factors, like if one person has a government pension or something like that. But usually, what happens when one spouse dies is that the smaller of the two Social Security benefits goes away, and the larger one is what the surviving spouse will continue receiving. And so, fortunately, if we are looking at a case where both spouses are still alive and haven’t yet made their Social Security decisions, this is a really big point in favor of the spouse with the higher earnings record waiting all the way until 70. Because what that does is it increases their own retirement benefit while they’re alive. But if the other spouse outlives them, it also increases that other person’s survivor benefit. So, basically, you’re buying an annuity that pays out—it’s a joint life annuity. It pays out for as long as either person is still alive and you’re paying essentially for that annuity. You’re getting it at a significant discount because it’s priced based on a single person’s life, but you’re actually getting a joint life annuity. So, it’s an excellent deal basically for the higher earner and a married couple to delay Social Security in almost every case for that reason.

Then there’s also the point that we talked about earlier about tax planning, where the surviving spouse often has a higher marginal tax rate. So, that has a variety of tax planning implications earlier in life in terms of doing Roth conversions, while both people are still alive, and so on. But the big point really as far as Social Security is, it’s a huge point in favor of that higher earner waiting until age 70 to file for benefits.

Benz: The book is written for surviving spouses, but I’m wondering if you can take the other lens. If some of our listeners, I’m thinking, are the financially savvy partner in the family and the relationship, and they want to set their surviving spouse up with as little hassle at the end of their lives as possible, are there any best practices that people should take to heart to ensure that their surviving spouse isn’t overly challenged, doesn’t struggle with more administrative tasks than really need to happen?

Piper: Absolutely. First thing that you can do is simplify. And when I say simplify, I mean two things primarily. Number one is, simplify the number of accounts. So, rather than having 401(k) and another 401(k) from a prior employer and a traditional IRA at Vanguard, another traditional IRA at Schwab, consider rolling that all into one traditional IRA somewhere. And there can be points in favor of keeping assets in a 401(k) and so on. So, make sure you do your own research. But if none of those points are relevant to you, simplifying is going to be very helpful to your surviving spouse.

And then, also simplifying the portfolio itself in terms of the number of holdings. If you are a regular on the Bogleheads forum and so, you’re super happy to manage your 10 index fund or 10 ETF portfolio with all the different slices and dices and you’re very happy to rebalance that and tax-loss harvest and so on, great. But does your spouse feel the same way? And if they don’t, then you might want to consider simplifying in advance. And simplifying might look differently depending on what the tax consequences are. If a large part of the portfolio is already depreciated assets in a taxable account, then there would be a cost to simplifying. But as far as retirement accounts, there’s no cost. You can scale it right back to a very simple three-fund portfolio. Or frankly, I’m a big fan of one-fund portfolio, so whether it’s a balanced fund or a LifeStrategy fund from Vanguard or a target-date fund. Even if you yourself don’t see that as the perfect asset allocation, perhaps it’s good enough. And if your spouse really isn’t into this sort of thing, it’s going to make it a lot simpler for them. So, that’s something you could do is simplify.

Another thing you can do is just make sure that your spouse knows where you have all of these financial accounts in terms of the financial institutions with which you have them. It’s surprisingly common for people to literally not know. They don’t know what insurance company, the life insurance, is through, for instance. And that’s clearly not ideal. So, make sure that you have some record somewhere that they know where it is that lists—this is who we have health insurance through, this is who we have life insurance through, this is who we have, whatever, this is where the Roth IRA is, this is where your Roth IRA is, which hopefully they know, but maybe they don’t. So, records that show where everything is. And then also, ideally, they have a way to log in to your accounts. So, whether you’re using a password manager, for instance, that would be ideal. But if you don’t, then at least knowing that they know where your passwords are. Those are the biggest things you can do. Make sure that they have the information necessary and can get access to the information necessary and simplifying in advance.

I always talk about Social Security. So, one more I’m going to throw in there is, delaying Social Security benefits increases the amount of safe income that a surviving spouse would have, and it’s safe income that doesn’t require any thinking. There’s no decision-making that has to be done after they’re receiving that Social Security benefit. It just comes in every month. So, it simplifies things also.

Ptak: Well, Mike, this has been a very informative discussion. Thanks so much for sharing your time and insights with us.

Piper: Thank you for having me. It’s been a pleasure.

Benz: Thanks so much, Mike.

Ptak: Thanks for joining us on The Long View. If you could, please take a minute to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: And @Christine_Benz.

Ptak: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)

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