Our First Ever Go Live With Tom LiveStream Episode! 4.9.2021

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

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Transcript:

Tom Vaughan: Oh, welcome to Friday, this is our first attempt at the Go Live With Tom, the whole concept behind this is just to expand investor education. Our big mission statement at Retirement Capital Strategies is to help our clients build and maintain their net worth. And we really focus on four main areas, financial planning, I think it’s important to have that in place and have that to be active tax planning, looking long term at possible savings in the tax area, of course, investment management, which we do a lot of, in fact, put out a video every day, talking about what’s happening in that arena. And then the last thing is investor education. And again, I’ve just found that for for my clients that know more, it’s easier for them working with me to build their net worth. And so that’s really kind of the big issue that we’re trying to get through today. So just format wise, so you can kind of understand, if you look there, at the bottom of the screen, you’ll see an email address, asktom@golivewithtom.com And if you want to ask a question here live, you just send an email to that and Katie Nealis, who’s here on the screen, is my co-host. She’s going to be doing the interviewing, so to speak, she’ll be watching for your questions. And then she’ll ask those questions live. If for some reason, we can’t get to the question, we will try to answer it, at the beginning of the next Go Live With Tom, we plan on doing this kind of every Friday, we will be recording this and placing this on our YouTube channel. And if you want to get notice of anything we placed on our YouTube channel, just feel free to hit the subscribe button. And then there’s a little bell icon that you can click, and then you’ll get an email when we put something on there. So that is the question portion. Now the one thing I have done is I’ve given Katie a question bank, so every week, I’ll give her a bunch of questions, just to fill in, in between live questions. And these are questions that have been commonly asked amongst the appointments. I’ve done 1000s and 1000s of client strategy sessions over the years. And so some of these are really things that have been very popular and been asked quite often. So hopefully there’s some of those that work for you. Also, if you if you can’t think of a question, of course, sometimes when we cover a topic, you will find something that you really want to you know, ask so just fire in the question, and we’ll try to get to it also so. So I’m going to let Katie, start off with the first question here.


Katie Nealis: Thank you, Tom. Well, the first question that we have in the question bank is, “Should I be converting my IRAs to Roth IRA?”


Tom Vaughan: Okay, yes, this is, this is one that I put in the bank first, because it’s probably the most commonly asked question right now, they change the tax laws, and multiple times, and every time it kind of leans more and more towards looking at a Roth IRA. So just very quickly, let me kind of talk about the difference. So you might have a traditional 401k, or our traditional IRA. And in those cases, whatever assets that you have in there grows tax deferred. And then once you get, to retirement age, you might start withdrawing on those, and then it’s taxable, when you take it out. When you get past 72 years old, they make you start taking out a certain amount, and then that amount continues to go up and up over the years. And so if you have a Roth IRA, or even a Roth 401k, that grows tax free, and so you don’t have to worry about, paying taxes when you pull it out, and they don’t make you take money out past age 72. So it kind of gives you some flexibility. With that, big difference, of course, when you put money into a 401k or an IRA, you get a write off. And if you put money into a Roth IRA or a Roth 401k, you do not get a write off. So those are the competing pieces. I would say honestly, in all of the tax laws that are out there, the Roth concept is one of the most powerful I’ve ever seen. And it really has the capability of doing, some great things. But the question was about conversion, you are allowed to convert money, at any point with any income and any amount from your IRA to your Roth IRA, you can convert from your 401k usually have to be separated from service in order to do that. So this may be after retirement. But I’m going to share my screen here and just give you a little example that I think you might find interesting. So hopefully you can see this well enough. I’ll try to describe this. This is a program called Right Capital. And what I’ve done is I’ve made up a sample plan so, Joe and Jane sample, and what I’m going to do is kind of show them in this case you how to look at the Roth conversion concept and see if it makes any sense for them. So I’ll describe what this chart is here. These little lines that are here are tax brackets, 10% bracket, the 12% the 22%. And so that’s basically you’ll see how important that is just in a moment. Now this green blob here is a projection for how much income that will have on their tax return each year for the rest of their lives. So Joe and Jane sample have $750,000 each in an IRA, and about a million dollars outside of IRA. So I know everybody’s got a different dollar amount, and you can still take a look at this, whether you have more or less, but the concepts will still be fairly, fairly similar. Now, there are some key criteria to make a Roth conversion work. Number one is you have to pay the taxes with money outside of the IRA. So if I take $10,000, and I move it from an IRA to a Roth IRA, and let’s just say my taxes are $2500, I need to take that $2500 out of kind of my other monies, my taxable money, I can’t take it out of that conversion, it won’t work. So that’s one criteria, that actually cuts a lot of people off from doing the conversion. But Joe and Joe and Jane here, they have some money outside their IRA. So you know, they fit that criteria. So then the next thing that we’re going to be looking at is trying to figure out what bracket to use, how much to convert, and does it work at all. So but we’re going to start with what’s called a Wealth Withdrawal Sequence. And this is very fascinating. So what it has here is called pro rata. Okay, so what pro rata means is that Joe and Jane hit retirement, and they need income. And so they have, say, 10% in one account, and they take 10% of income out of that account, they have 15%. And another account, they take 15% out of that account. This is not a concept I see very often, but what they’re doing in this program is using this pro rata as kind of a base for you to take a look. And then as we make adjustments, you can see how it changes. And what we really want to focus on is how much more or less we have based on different things that happen as I change these parameters down below. So very quickly, we’ll look at the Standard Distribution Methodology, which would be to take you know, and Joe and Jane’s case to take their incomes first from their taxable accounts. And then tax deferred accounts and tax free accounts, which would mainly be Roths in that sequence, well, you can see here that adds $650,000 more to their net worth, which is great, that’s really a big deal, actually, just by having that sequence. Now, just to kind of emphasize how important this is, I’m going to go down here and do the wrong sequence. So you’ll see this go $750,000 less. And so what this sequence is, is they’re going to go to their IRAs first, and use those and then eventually get to their taxable accounts. And if they have any, they would use their tax free. I see this sequence all the time.

And what people tell me is, “Hey, I saved in my IRAs, or 401Ks or what have you. Those are my retirement accounts, I’m now retired, I’m going to take money out of those retirement accounts.” Well, unfortunately, in this particular case, if you do that, they’ll actually end up with $1.4 million less than net worth. So let’s go back to the standard. And we’ll leave that as our as our base case now. So remember the $650,000 to now we’re going to go down here and just take a quick look at converting IRA. So this little slider allows me to try different levels. So what I did here first was I said, All right, if we have any room inside the 10% tax bracket in any one year, we want to convert and fill in that bracket. Well, it didn’t do anything, mainly because they already have the 10% bracket, that’s this line here at the bottom filled. Alright, so then we go to the next one, 12% now says 12-15%. Because the the current tax brackets sunset and disappearing in 2025. And unless Congress continues them, they’ll actually go back to 15% where they weren’t before. So we’re assuming that they don’t, you know, go back, I mean, assuming that they don’t get keep at 12%, it actually goes back to 15%. Now we can see that there’s an increase $918,000 instead of $650,000. So converting at the 12%. And you can kind of see here, where it filled in see that that little blue part, it filled in the 12%. And that’s why those lines are important. All right, a couple more here. 22%. Wow, big difference. $1,400,000 increase, right? Forgot a 24% actually goes backwards. See that. So what that just told me was that the optimum bracket for Joe and Jane to fill is 22%. And what’s really, really wild here, if you look closely at age 85. If we make the conversions, they’ll be done converting at about age 82. And they’ll have zero income taxable income at age 85, which is completely different standard of living, versus if they don’t make the conversions they end up with $278,000 dollars worth of taxable income, which is really, you know, kind of a big, big piece here too. So, the other big criteria just to cover is that people see it, they like it, they want more money. But when it comes time to actually paying the taxes, it can be really painful. Because if you look here at the first year, they would have had $47,562 worth of taxable income, but they’re filling in the 22% bracket, which is $172,000, that’s a lot of money to pull out of your pocket to pay taxes. So you have to be committed to make this work. But it can be life changing. And it also makes a big difference to beneficiaries. If you look here, in their current case, they don’t have any tax-free assets. So everything that would be inherited would be in these tax deferred or tax, taxable accounts. And the tax deferred section here has to be taken out over a 10 year period. So the kids are, if that’s who it is, would be paying taxes versus over here, we’ve got 100% tax free income tax free estate, which is really, you know, an unbelievable situation to leave your kids, they still have to take it out over 10 years. But anyway, that’s, that’s how that works. So hopefully, that helps explain a little bit, you know, how the conversion works. There’s a lot more details I could spend, 45 minutes on that, obviously, but that that was a good one. Any other questions?
Katie Nealis: Great. Love that visual, Tom. Thank you.


Tom Vaughan: Thank you.


Katie Nealis: We have another one from the question bank, “What do you think about the new infrastructure plan?”


Tom Vaughan: Okay. So obviously, the infrastructure plan was announced, a couple of weeks ago now. And it was a couple of things. Number one, one of the things I always look at is after the announcement, how does the market react? So if you go back to, you know, when they announced the stimulus plan, the $1.9 billion, trillion dollar stimulus that was put out, the last one that passed, the market went down right away, right after it was announced. And, we’ve seen some softness in the market, as it’s been coming out, there’s some concern with, the inflationary environment that’s happening. And then before the announcement for the infrastructure plan, the market kept kind of coming down every time it was talked about. But then once it was announced, and Biden did his, presentation, the market went up pretty heavily, my effect has been going up pretty, pretty well, ever since then. So I think one of the things personally, that I believe that that the market really liked was that it was going to be spread out over an eight year period. And so that just tends to be less of an inflationary push, there’s less treasury bonds, if they need to, that need to be sold, which, can help the bond market as far as that goes. I think overall, that is a win for, the country, we’ll have to see what happens with the taxation portion, because they’re talking about increasing corporate taxes, from 21 to 28%, closing some loopholes on federal, I’m sorry, international money. And so, how’s that going to impact I’ve seen, like, projections from five to 9% reduction in earnings. And of course, earnings is one of the main drivers in the stock market as a whole. So, we’ll have to wait and see what happens there. As far as that goes, but, we might see an earnings hit. But if the economy gets rolling the way it seems to be rolling right now, it might get kind of buried in the gains that are coming into the economy also. So we’ll have to see, but I think it’s a positive situation altogether, after, looking at everything and, and the market seems to agree with me.


Katie Nealis: Right, well, we do have a question coming in from Woody.


Tom Vaughan: Oh, yeah.


Katie Nealis: “What sort of succession plan does RCS have for its management? If Tom wins the lottery, is there another Tom waiting in the wings?”


Tom Vaughan: The lottery, I actually, I’ve had several different people approached me and kind of pester me about trying to buy the business. And the last time I had that I had a gentleman, he just kept talking to me. And I said, Look, if I was given $15 million tomorrow, I’d still come in and do the same thing. This was originally my hobby that turned into my business. And I plan on going until I’m 75. I’m 56. So health and whatnot, and mental well being, hopefully, is there for that entire timeframe. But yeah, we already have, you know, there’s nine of us at RCS, my other partner, Mike is a, an advisor also. So he is, you know, kind of ready to step in if need be. We have a new advisor Easan, who is being trained in all of the things that I’m doing, and over a period of time, we’ll continue to build out that advisory practice. And Cam, a lot of you know, Cam Neri, she and I merged together and that was her succession plan. So that’s another possibility also, at some point, is to merge with another practice and kind of get them together. Just a matter of finding the right fit as far as that goes. Good.


Katie Nealis: Great, thank you. We have another question from Taylor, “How do you see the rollout of the vaccine affecting the market? Is there something we should do to prepare for market changes that come up as things open up more?”


Tom Vaughan: Yeah, the vaccine is actually the story for the most part. I mean, if you take a look at what’s happening in Europe, for example, they’re way behind the US and the UK, in rolling out the vaccine. And now they’ve got these new variants, which are more contagious, and they keep closing down. So we saw closed downs, and, all over Europe, France has been closed down and what have you, so that that has impacted the market negatively even here, because, you know, it is a global picture. Having said that, in my opinion, all of that stuff is going to be worked out. And we’re going to see a reopening like nothing probably we’ve ever seen before. So, we’ve never seen a pandemic in our lifetimes. But I think the pent up demand, the number of dollars that have been saved last year that didn’t get spent that are going to be spent this year is going to be incredible, and what are called Epicenter Stocks. And these are stocks that have been negatively affected by the virus that need the virus to be under control, to really take off I mean, Disney Land and Disney World are examples, restaurants, hotels, all of these things that, have been impacted. I think you want to be invested in those areas, because there are now cut back their cost dramatically just to survive. I mean, airlines had a 96% drop in their airline miles, so they had to cut back to survive. And now at the big push, American Airlines just said they were only 10% below where they were, at the beginning of the pandemic right now. And I think they’re going to go way above that, just because again, there’s lots of pent up travel demand that’s going to happen. So the vaccine is the key, the roll out of that the smoothness is that how fast that happens. It’s not just here in the US, but worldwide. So yeah, it’s a really good question.

Katie Nealis: Here’s one from the question bank.


Tom Vaughan: Yeah.

Katie Nealis: “What is an ETF?”


Tom Vaughan: Ah, okay. So an ETF stands for Exchange Traded Fund. And so the concepts if you go, there’s different pieces. So you could say, Okay, I want to buy an individual stock, let’s say Ford. Well, I can buy Ford, right. Or maybe I want to buy more of the automobile, automobile makers, even internationally. So an ETF would go out and put together a basket of auto companies, for example, there’s, there’s a, there’s 2300 ETFs that I follow, that kind of fit my criteria. And they’re basically all different baskets of different types of stocks, and what have you. And it’s a really, really great way to be able to buy a diversified piece without having to, let’s say I wanted to buy the S&P 500. Well, it’d be pretty onerous to go out and buy all 500 stocks, but I could go to Vanguard and buy theirs. And I buy one, it’s called VOO, for example, is the ETF. And I buy that and I can get it for you know, without any commission right now at TD Ameritrade or Charles Schwab actually where we’re where we’re working. And then it trades like a stock, I can buy and sell it during the middle of the day, I can, put in a stop loss. If I want to try to protect my losses, I can do covered calls and different types of options on those. And they’re really, really fantastic. And actually the I think the fastest growing area of investment right now is the ETF arena as a whole just because it does meet so many criteria for people. So that’s that’s what an ETF is, it’s it’s a good thing to know about.


Katie Nealis: “Well, Tom, let’s say I have $2,000. Should I buy an ETF, a mutual fund or a stock?”
Tom Vaughan: Hmm, I personally, especially when you’re first starting out like that would would probably I just started with a very young client had a little bit more than that, but not that much more. And I asked him and talked to him about kind of, what he was interested in, and we picked one stock, and we put that in there. And then the rest of the money went into ETF. And so I think , it’s very important to try to get a decent rate of return. If you pick the wrong 1, 2, 3, 5 stocks. Now, your $2,000 is all of a sudden, $1,000 you’re not gonna have a lot of enthusiasm for investing at that point in time. So I do think it’s good to get started in the right way. But I think it’s really fun. Maybe you buy 100 shares of one stock that you’re very interested in. So kind of that combination, and that’s what I just did with one of my really young clients of family, a child of one of my clients so and it’s been fun. I think that’s kind of the way to go. I got started with individual stocks, but the ETF didn’t exist. And now I have way more fun trying to find categories that are doing well. And I buy the whole category. And I’ve done better there than with the ETF. So I would do mostly ETF, but the stock part is still fun.


Katie Nealis: Great, thank you. Here’s another one from the question bank, “I’m trying to decide if I can afford to retire, what’s the best way to figure out when to retire?”


Tom Vaughan: Yeah, this is one of the most stressful periods, at least financially, that that people run into, outside of, you know, not being able to pay bills and those types of things. But it’s just, all of a sudden, you go from, earning a paycheck to having you know, the money, disappear from your paycheck, and you’re living off of your assets, and maybe social security or, other things, pensions that you might have, and it can be a really tough decision, what we do is we prepare a financial plan. And that’s really critical. So in that plan, you’d have all of the different income sources that you might have coming in, rental income, pension, Social Security, those types of things, you’d have all of your assets that you have, taxable accounts, IRAs, 401K’s, how they’re structured, and everything, and then you’d have kind of your goals, hey, what do I want to do, I want to spend this much I want to travel, I want to have money, in the future, for the for these money, gift to my kids, or charities. All of those are the kind of the outflows. And once that’s all in there, with these current financial plans, you can do what’s called Monte Carlo simulation. And what it does is it runs your financial plan 1000 times. So it’s running down this path over and over and trying to see, what happens in different situations, the market is great, the market is terrible, you have higher expenses, inflation is low, all of these scenarios, and out of 1000, how many times did it work. So if it only works, let’s say 400 times, that your plan is not going to work. I mean, it’s too many failures, you’re probably going to run out of money. If on the other hand, your plan works 900 times your plan is probably going to work. And so that’s, that’s what that’s what helps with the decision, and we run the financial plan, it says, okay, that works. You know, it’s within reason, usually, for retirement, I’d love to see more than 850 successes out of 1000. So higher than 85% would be something that would make me feel comfortable in advising somebody that they could retire with those goals. And then we redo that plan, every six months, when we have our strategy sessions, we kind of push the button, look at the Monte Carlo simulation. And it’s really just like an early warning system. So if there is a problem that’s coming up, because of market downturns or expenses were higher, it gives some time to make adjustments to those. So Monte Carlo simulation and a financial plan is the only way I would decide, whether retirement was possible at some point in time.


Katie Nealis: Great. “So let’s say it’s about I’m about 35 years older, I’m going to be retiring soon, how do I generate an income to live off of?”

Tom Vaughan: Oh, okay. Well, first of all, most likely, at some point in time, what I call outside income sources, they have to take a look at so Social Security will be one that comes eventually if you qualify, you might have a pension, you might have rental incomes, royalties, I’ve seen all kinds of so you have to take a look at those first, those are your basic income sources and kind of plot them out when they’re going to come in. And then if there’s a deficiency, in other words that you need more money to live off of, which is very common, actually, then you’re going to live off of your assets. And so drawing income on your assets is a really interesting area. Because when you really look at what a lot of people are doing, they’re buying a lot of bonds and trying to live off of the interest, used to be people bought CDs, and live off the interest, but now they’re not paying anything, or they buy dividend paying stocks. And the problem with using those strategies, especially solely to generate the rest of your income, is it kind of shows your portfolio off into this one category. What I have found and this, I’ve been doing this for 34 years, and it has worked, I have found that I want to keep a balanced portfolio. So it might be 20% stock or 40 or 60 or 80, whatever it is, I create a balanced portfolio. And then we set up a distribution right out of the money market. It’s called a Systematic Withdraw. And then when the money market runs down, we rebalance the portfolio replenish the money market. And as long as the withdrawal is somewhat reasonable someplace in that kind of 2 to 5% range to kind of really depends on what’s going on with the markets and you have to be somewhat flexible there too. But that has worked fantastically well. And actually, the thing that really fascinates me is that I merged with Cam Neri in 2005. She had her own practice it was roughly the same size as mine when we merged, she’d been in business for you know, 20 plus years I’d been in business For 20 plus years, and we both had exactly the same methodology, we both did Systematic Withdrawals, and it had worked up until then. And it just continued to work since then. So using a Systematic Withdrawal on a balanced portfolio, I think that’s the best way you’re getting some dividends, you’re getting some interest from those bonds, and you’re getting some long term capital gains out of those stock pieces. And it just allows you to kind of have this overall balance and kind of march forward.


Katie Nealis: Great. Well, we have a question in from Nancy, regarding Roths, thank you for speaking about them.


Tom Vaughan: Yeah.


Katie Nealis: “When my children inherit my Roth and have to spend it over the next 10 years, can they move it over into their Roth accounts as a tax free?”
Tom Vaughan: Yeah, unfortunately, no, I mean, this is actually one of the things that they changed at the end of 2019, they changed the tax law, you used to be able to spread out your your kids could inherit your Roth or your IRA, and they could spread it out, essentially, over their lifetimes, they have to do this thing called a Required Minimum Distribution. And it really takes small amount out for the rest of their lives. Well, the government needs the tax dollars. And so they change that to this 10 year window. And no, unfortunately, they cannot put that into their own Roth. The one nice thing about the difference between inheriting a Roth and inheriting a regular IRA, they both have to be taken out over 10 years. But theoretically, you could leave the Roth until right at the end, let it grow tax free for as long as possible. I converted all of my IRAs over to Roth, the me and at the end of last year, and I talked to my kids leave it then for 10 years, if something happens to us, and then take it out at the end, because they get that tax free growth. Now, if those would have been still an IRAs, if you leave it till the end, depending on how big they are, it could be kind of detrimental, because you can pay a lot of tax on that big lump sum. And so most likely, with IRAs, especially bigger ones are going to want to spread that out, which of course, creates all kinds of other problems, but it can’t move it unfortunately, into their Roth. Theoretically, if they have, earnings, they could take, $6,000 of that money and put it into their own Roth. But obviously, they might be getting a lot more than that out of your IRA, but that they could fund contributions to a Roth going forward using some of that money. And that won’t be a huge deal. But that anyway, that’s the that’s the way that you could take advantage of a little bit.

Katie Nealis: Great, thank you. Well, here’s another question we have from the question bank. “What is the best area of the market to invest in right now?”


Tom Vaughan: Yeah, I think I get asked this quite often, actually. And it’s, it’s really difficult to say best, right? I mean, there’s so many areas, and there’s a lot of areas that are really like, It’s why we do diversified portfolios, because we’re never sure which one’s going to be exactly the best. But the one area, and I’ll share my screen here, and try to describe this. The one area that I really like right now is transportation. And this is a chart, but let me explain the chart just really quickly. This is this is a ETF called XTN is the ticker symbol this the last year. And this is the SPDR series transportation ETF. And so this is, you know, airlines, railroads, trucking companies, logistic companies, etc. And in this chart, you can see this channel here, this is called a multi regression channel. So, I want to see that going up. Right. So that’s important. That’s why I use the channel. I mean, I’ll show you an example here. Here is a Vanguard’s long term treasuries, right? Look at that channel is going straight down, some investors are trying to bottom fish and that’s they use that just the opposite. I tend to be more of a momentum player. So I like to see that channel going up. So if I go back to here, and, so this, this is important to me that, the 50 day moving average, which is this orange line here is up that 200 day moving average is up and then down here, this is what’s called relative strength. So this blue line represents this particular ETF, XTN. This red line down here represents the S&P 500. And so when this blue line is above, that means that it has relative strength vs. the S&P 500. So one of the things I like about transportation, we just bought this about 10 days ago in our in our traditional model portfolio. And one of the things I like about transportation is I think there’s a dual possible win here. Transportation is about moving people and goods, right? So I think both are going to increase here as there’s a reopen, people are going to move around more whether it’s in a car, rental car, whether it’s in you know plane, and then goods are going to move around more because the economy picks up and so I think it’s kind of a double win as far as that goes. So I like XTN here, but there’s other ways of doing it. There’s another one here called AWAY. Now this focuses on kind of the technology side of travel. So TripAdvisor and Bookings and Expedia, Airbnb, as also includes Uber and Lyft, for example. So again, theoretically, all of these might do better. And people might use these types of things more than they were during the pandemic. And so we might see some increase in price, you could go a little bit more narrow, and just buy the airlines, and all the airplane manufacturers, this is called JETS. And that’s, this is a global jet, ETF, all of these are up there moving along. And so I really think that’s kind of interesting. And then the last one that you might want to consider, and this is a little bit different, this is called HAIL. And this is a SPDR series is called Kensho Smart Mobility. And so HAIL is electronic vehicles. It is, you know, autonomous driving drone delivery systems. And so these are maybe how people will be moving or goods might be moving in the future. So the double piece that you could get out of this, it’s not just the reopening, but a lot of these could be also impacted positively by the infrastructure bill, which are talking about trying to pass in, October. And again, I’m not a big, not a big believer in trying to invest prior to a bill passing because it might not happen, but I really like things where you could go into either, it could go either way. So in other words, this could benefit from the reopening and or it could benefit from the infrastructure plan. So anyway, there’s, I think transportation is definitely a really interesting area to look at right now, with what’s happening.


Katie Nealis: Great. Loved that visual, Tom.

Tom Vaughan: Oh, thank you.


Katie Nealis: Um, so we have another question from the question bank, “Do I need to make any moves because of the possibility of tax increases under this administration?”
Tom Vaughan: Yeah. So there are two pieces that are being talked about for individuals. There, there’s several pieces that are talking about tax increases to corporations, that could impact your investments. So there, you want to be looking at how that’s going to happen, and what you might do around that, which industries are going to be more impacted by those increased taxations. And which ones aren’t. But the two parts that are that they’re talking about so far. And again, this is just talking, we’ll have to see what actually happens. Number one, is increasing the tax rate for those above $400,000. So far, it sounds like they’re talking about just households. So a couple is going to kind of take a penalty here, he has more chance of two of your working that you might be over $400,000 than a single person would as a single filer, but they’re talking about increasing the top rate back to 39.7%. And right now, the top rate is 37%. So anyway, that could have an impact. And I’ll talk about what you might want to do there. But the other impact is even more interesting. And that is that they’re talking about increasing capital gains rates, up to ordinary income if your income’s over a million dollars. So right now that top capital gains rate is 20%. That top rate that you would be at an ordinary income if you had more than a million dollars would be 39.7%. So it’s almost a doubling of the taxation on capital gains. And so the biggest thing I can see there, because I don’t have a lot of clients that are making over a million dollars a year, per se, but I do have clients that sell homes here and move to other places. And so I do think that’s where I’ve seen people that have more than a million dollars worth of gains, we’ve had tremendous growth in property values here. So it’d be really interesting to see how that plays out. I suspect that if they pass this and say it’s going to start in 2022, we’ll see a lot of people selling their homes in 2021. And, if they were gonna move to, you know, Arizona three years from now, they might do it now. So you know, we’ll have to see how that plays out. So that’s one thing to look at is if you have enough capital gains in your home, what you might do in terms of dealing with, that gain in terms of the income over $400,000. And going up, it’s not going up that much. I’m not sure it’s that detrimental, per se. You know, we’ll have to see, but it might impact say a Roth conversion concept in terms of trying to keep your conversions underneath that tax bracket, etc. So, again, we’ll have to wait and see what actually happens, as far as that goes. And that that’s being worked out now.
Katie Nealis: Definitely. Well, here’s another question from the question bank.


Tom Vaughan: Yeah.


Katie Nealis: “Do I need to make any moves because of the Oh, sorry, that was the same one.


Tom Vaughan: Yeah.


Katie Nealis: “I’m worried about my kids. How do I get them going in the right direction financially?”


Tom Vaughan: Yeah, I’ve had a lot of this come up in the last, you know, 12 months, maybe it’s because everybody’s spending so much time with their kids stuck at home. And so, for me, I got started. When I was 12 years old. There was a contest at school. They gave us you know, phony money to invest in the stock market for three months, and I got really excited. And my grandfather was, he was really into the stock market. And so he worked with me, on that, and that got me going, and it just, lit it up. So I do think something like that, where you kind of have your kids have some investing, maybe they pick a stock or two that they like, it’s something you can identify with. But for, for an adult child, definitely setting up a financial plan, because when financial plan just gives you this path, now, it might not be a path, you stay on forever, and you make adjustments, but it’s very motivational. If you have a path and you say, okay, hey, I can retire here, if I do this, and this and this. That’s a really fantastic way. And so we’ve been doing a lot of financial plans for the children of our clients. And I really think kind of that combination of having something in an investment that they’re interested in, and then having a plan so they can be motivated about kind of saving, and what have us as far as that goes to. So those are the strategies that seem to be working so far, with the clients, kids that we have now.


Katie Nealis: Great. “Should I use a regular Roth or 401k?”


Tom Vaughan: Yeah, a lot of companies now have the choice between a traditional 401k and a Roth 401k. And so just again, to tell you the difference, you can put in $19,500, into, either one of them. And if you’re over age 50, you can add another $6500. To that, you know, to get to a maximum of $26,000, that you can put in there. And then you might be getting a match, in some of these matches are really, really high, and it’s becoming kind of competitive. So the thought process would be, if you use the Traditional IRA, you get the write off. And, if you’re making enough money to put away, say, $26,000, you might need the write off in today’s world, if you put it into the Roth 401k, then you don’t get the write off. And so, having said that, I’ve seen the other side. And right now what’s happening is all these people putting money in Traditional IRAs are looking at a tax time bomb. I’ve got clients when I do this Right Capital projection for them, were at age 85, they’re looking at $400,000, or a $1,000,000, or a $1,250,000 worth of taxable income, really, because they’re required to take out money through the what’s called the Required Minimum Distribution. And that’s where, the other side of that really becomes a problem where, if you look at the Roth side, I don’t have to take money out at 72, it grows tax free, I’ll have tons of flexibility going forward. And it’s why I converted everything, I’m only, I’m only adding personally to my Roth 401k, I have nothing in tax deferred anymore. Everything’s in tax free. I’m giving up, tax write offs. I’m in a very high tax bracket. My average client’s 74, I’ve seen the other side, I’ve seen what happens when you build up all of these assets. It’s not the end of the world, believe me, I one of my clients told me once, he’s complaining about his taxes, and his son said, “Hey, Dad, give me your money, and I’ll pay your taxes.” So we got to be careful, about not complaining about our taxes too much. But, a lot of my clients that are, in in that situation, right now, they didn’t even have a Roth 401k option. That’s a fairly new option. But for those people who do have that option now, or for those younger people that are out there, I’m constantly trying to encourage them to give up the current tax write off for the tax free growth. And you know, we’ll see what happens tax wise and what have you. But I think that’s a pretty strong recommendation, actually.


Katie Nealis: Great recommendation. Here’s another from the question bank, “Is the market too high to put in any new money at this point?”


Tom Vaughan: Yeah, I mean, you saw some of these charts, definitely, that I was just showing you, there’s been a really big run up from the bottom. Last March, we hit the bottom of the 23rd of March. And so it’s definitely not inexpensive anymore, and compared to earnings, or even compared to future earnings. So you could make an argument there now, I would kind of divide the market up into different pieces. Last year, the biggest run up was in kind of, innovative technology, technology in general, advanced healthcare, like genomics and those types of things. Clean Energy, some of those companies got to a point where they were selling it, like 70 times sales, and not not earnings, but just sales. And so, some pieces there are really up there. And those have actually come down a fair amount since about the middle of February. So I might be very cautious in that category. Because when the economy recovers, money tends to float into what called a Cyclical Stock. And that’s a stock that’s sensitive to the economy. So it tends to go up with the economy. And mainly, you’ll find those in the Value category. So I think there’s some room in the Value category, it is definitely run up from where it was, as far as that goes. But you take this pent up demand, you take the Federal Reserve that is sitting there saying, “Hey, you know, we’re not going to raise rates, even if there is higher inflation.” And we’ll have to see how the market handles that higher inflation that’s gonna be really interesting. But in the end, stocks are good inflationary hedges. And when there is higher inflation, oftentimes, that does eventually lead to higher earnings. And so I think it isn’t a bad time at this point. I don’t think we’re, at the top. Personally, I think there’s a bunch of room to grow here, especially in the value side of the equation.


Katie Nealis: Thanks. Here’s another form of question bank, “What do you think about inflation and the impact it might have on the stock market?”


Tom Vaughan: Yeah. Okay. Yeah. So that the inflation is going to be very interesting, we really haven’t had much in the way of inflation for a really long time. And, we’re I mean, we’re not used to it, it does have to be put into context. So well, right now, everybody’s talking about inflation, because we just did put out this huge stimulus bill and the Treasury, the 10 year Treasury went from about .6%, back in August, all the way up to high of 1.75%, just recently, and that’s a big gain, that’s a big jump as far as that goes. Now, having said that, that 10 year treasuries at 3%, before the pandemic started. And that’s still a fairly low yield on the 10 year Treasury, which is kind of a representation of of inflationary pressure. The other thing to consider, too, is that we had a high inflation back in 1974, was 12.2%, for that year. So that was, that’s what people are thinking about, especially money managers is that period of time when inflation really ran, right now, the projection is 2.4% for this year. I think that’s going to be low. That’s from the Federal Reserve. But it’s still a long ways away from 12.2%. Even if it’s higher than that, I think the market will struggle, if inflation comes very rapidly and very quickly. But once we get through that struggle, and yields get set to certain levels, I think, then we’ll start to see these higher earnings coming through. And so I wouldn’t be surprised to see some softness during that period of time, if we do have high inflation, but nothing that I would call a bear market in that period, because it’s most likely temporary. Once all these people have kind of exhausted themselves from this pent up demand, and the supply has grown to kind of meet that, then I think pricing comes back down. And the Federal Reserve actually has a projection for 2022, where inflation is at 2% on their measure, so they’re expecting it to be higher this year, and then go back down again next year. So we’ll have to see how that works out. But Systemic Inflation at 12% is a problem for the stock market, no doubt. But just we’ll have to wait and see, how this plays.
Katie Nealis: All right. Well, Tom, we are almost at the top of the hour. About just one more question.


Tom Vaughan: Oh, sure.

Katie Nealis: So one more question. Last one to end our stream will be, “When should I take my Social Security?”


Tom Vaughan: There’s a big one, I did an entire 55 minute seminar just on that subject, but very quickly. Social security is a really, really complicated calculation, actually, we have multiple programs that we use to try to figure out the optimum methodology for taking Social Security, you can take between 72, I mean, 62, and 70. And if you’re married, there’s all kinds of strategies. So the way to figure out how to take how much to take, when to take your Social Security is to put it into a financial plan, and then use the optimizer off of that plan. So you can see, what happens at different ages? How does that impact your other assets? Because hey, if you decide to wait, you’re gonna have to take the money out of someplace, how does that impact? You’re going to get it, 8% gain on the waiting from the Social Security Department. So I would say the best answer that is to use a financial plan and then go through the optimization program portion of that to figure out, what’s the best, age to take it? But it’s, it’s more complicated than it sounds. It’s very fascinating. Okay, well, thank you, Katie. And thank you, everybody, I really enjoyed the whole process. I hope you enjoyed it. Also, we are recording this. And again, if you want to subscribe, to the channel, you hit the subscribe button, if you hit the little bell, it’ll also notify you when we post things. So we’re going to post this on the on the channel every week. And then we’ll actually carve this up into different pieces. So if you just wanted to watch the portion about the Roth IRA or send that to somebody else, we can do that too. So, anyway, but you’ll see those pop up on the channel also. So, thank you very much everybody, and everybody have a great weekend. Thank you.


Katie Nealis: Thank you.

Tom Vaughan: Bye.

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

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