Business Innovators Radio - Interview With Chris Patterson, Retirement Income Strategist Discussing Tax Risk

Episode Date: September 10, 2024

Chris is a CPA/retirement strategist/basketball coach/husband/father!He has been assisting clients with tax and retirement income strategies for over 25 years, he loves what he does and wants to assist as many people as possible.Learn More: https://innovatemyplan.com/Past performance is not a guarantee of future performance. All strategy recommendations must be associated with a full review of a client’s personal situation.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-chris-patterson-retirement-income-strategist-discussing-tax-risk

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us Chris Patterson, who's a retirement income strategist and we'll be talking about tax risk. Chris, welcome back to the program. Hey, Mike. Thanks for having me again. Great to be here. Hey, so we don't have nine and a half hours to talk about this topic,

but I think we could take 29 and a half hours, right? Because tax risk, boy, what a huge Pandora's box that is. So let's just get started with where do you start talking with your clients about to bring to their awareness that taxes are there and there are going to be risk and it's going to impact and chip away at your retirement portfolio? So we need to factor that in so that you have enough money to live to and through retirement. Yeah, absolutely. And I think the, you know, with the background that I have in in tax and having prepared tax returns and having done that for so long, with most, if not all clients, we generally kind of start with the end in mind. And what I mean by that is we'll typically kind of look at, okay, what do you need from a retirement income standpoint? What does that look like?

How do we structure? But based on, you know, sort of the initial recommendations, we'll immediately go into preparing kind of a mocked up tax return to look at, okay, what's the actual tax impact of our recommendations to the client? And it is, I do have a little bit of an advantage because I still prepare tax returns and I can work. through a tax software and actually look at that scenario for a client. But it gives the client the sort of the clarity of I'm going to take X amount from my traditional IRAs. I'm taking X amount from my Roth IRAs. I'm taking X amount from my taxable accounts.

Maybe I'm taking distributions from an annuity, whatever the case may be. But here's the final number that I'm actually going to pay in income taxes and the net that I'm actually going to receive. in retirement income. And if that exercise doesn't get us to the place that the client needs to be, then we've got to go back and kind of rework the strategy. And I think a lot of times what you see with advisors is they'll make a recommendation on a strategy and they'll say, this is a great strategy for you.

We want to execute it. It's awesome. Protect your assets, give you great returns, all that stuff. And then when a client goes to file tax return, you know, after their first year of executing those strategies, they look and they say, well, my gosh, I paid, you know, $10,000, $15,000 more in taxes than I expected to. I had no idea this was coming. And then those strategies almost immediately become worthless because now you've got to go back and kind of rework everything if you can. So that's what we have. That's what the client has to understand is what is the impact on their, actual tax return of taxes based on strategies that are being recommended. So I love that you said begin with the end in mind because I'm a big quote person. I know Stephen Covey was famous for saying that. And it just makes so much sense because if you've got your eye on the prize,

your North Star, you know, looking forward, you're not then getting tripped up over the details of, you know, what's one inch in front of you. You're beginning with the end of mind. That's the goal. Then you're working backwards. Well, here's my question. when you're thinking about how much taxes will I have to pay, it's a big question mark, because you won't know what the tax rate will be, what their tax bracket will be in 5, 10,

15, 20 years. You don't know that. So you're going to be making some educated calculations. But what my question is, how do you calculate that to get as close as possible? And I guess it could get down to as simple as Mr. and Ms. client, do you feel like taxes are going to go up? or down in the future. Yeah. Yeah.

And, you know, I think we all know the answer to that question with what most people and whether that becomes reality or not, none of us know. But I think many of us in my industry and just many of us in general do kind of have the belief that the tax rates are going to go up in the future. I mean, if you just look at, you know, where we are right now with our tax rates, we're historically low and it's only been lower three times in the history of our country. And then you look at, you know, just kind of the fiscal situation within the country. Just forget about politics for a second.

Just look at the numbers. And you would think, okay, yes, there's probably going to be some tax rate increases. And so, you know, we always start with our planning with a client with kind of a lofty borderline unachievable goal of a 0% tax bracket in retirement. And we start there because that's awesome if we can get there. It's unlikely for most, if I'm being completely honest. But we kind of start there because, you know, what was the old Casey Kasem, you know, shoot for the moon. You'll always end up in the stars. You know, that's the thing.

So we're starting with that target. But at the end of the day, we're really just trying to mitigate taxes as much as possible and reduce the risk. of rising tax rates in the future having a negative impact on a retiree's income. Because if you're, you know, if you need $5,000, $6,000 a month and you're taking out, you know, gross of, you know, $8,000, $8,500, if tax rates go up, now you're not getting to the net that you need. And so we've got to try to mitigate that risk now with really no idea of what tax rates are going to look like in the future. So it's a challenging planning exercise, but it's critically important for the client. You know, I think that a lot of times people might go,

oh, yeah, well, you can never know that this or that or the other, well, regarding taxes going up or your tax bracket or whatever the case is. Well, am I correct in thinking that taxes, if the tax rate goes up, it's kind of tied to like, the deficit, which we know is a huge number and going up a lot. So one way to keep taxes down is to reduce the deficit. And we know that that's probably a losing proposition. And then the other thing is let's cap government spending and keep that under control. And we know that's probably another losing proposition. So given those two main drivers of containing taxes, do we really think taxes are going to, so I think that a lot of times people can hear someone like you going, oh,

taxes are going to go up. So we let's do this strategy and go, well, how do you know? Well, these two things right here just from a logical standpoint of, you know, like me saying that and I'm not an advisor, isn't that a pretty accurate common sense way to think about it? Yeah, it absolutely is. And my position is always this. Do I know that tax rates are going to go up? No, I don't. Does the math tend to make me believe that they're going to go up?

Yes. But here's what I talk with clients about. Can we eliminate the risk, right? can we eliminate the risk in an efficient manner for the client? And, you know, just give you kind of an example that everyone always tends to talk about is, you know, Roth conversions. You know, can we execute raw, you know, traditional IRA to Roth IRA conversions in, in an efficient manner for the client so that three, five, seven, ten years from now when they retire, that we've basically prepaid all the taxes that we don't have to work. about the fear of tax rates going up. So it's it's kind of, you know, with any risk, it's a risk. I don't know if it's going to happen or not, but can I eliminate it or at the very least,

can I mitigate it? And that's what we're trying to do through the tax planning that we do with clients. Yeah, because you're not going to eliminate or mitigate it worldwide, but if you can mitigate it for your personal retirement plan, like you mentioned, like would a Roth conversion be beneficial question mark. Let's take a look at how old are you now? I mean, all of those factors. But if you can execute that and take the tax hit now when taxes are known and who knows what they're going to be in 10, 20 years, but probably going up, would a Roth conversion be a good idea? Well, if that's the case and then your money grows inside that Roth tax free, which it does, then that's a great strategy because who cares then what the tax rate is? You're

insulated regarding that one one account. So what about, you mentioned, you know, the Roth conversion. What about another way to mitigate taxes like life insurance? I think that's something that factors in, that's not money in the market, quote unquote. How does that play into your recommendations? Yeah. So I tell you, it's life insurance is a lot of people's least favorite topic. Word, yeah. Yeah, what tends to get missed with life insurance is the incredible tax advantages that come with it.

You know, a lot of folks have heard of Ed Slott and David McNight, two of my favorite CPAs, and they certainly sort of believe in the use or the role of life insurance in a, you know, in a long-term retirement plan. Here's what I'll say about life insurance. Can it make sense as kind of a Roth conversion? alternative, you know, for a lot of folks, yes, it absolutely can. Most, more often than not, what we're talking about there is something called index universal life insurance. And it is a, it is a extremely powerful strategy. There are some complexities to it. So it can be a little

bit challenging to help a client understand the structure and what goes into it and, you know, exactly, you know, how it benefits the client long term because there's some hurdles that the client has to overcome. They've got to qualify for the life insurance. It is generally one of the more expensive, you know, investments or products that you can get into initially, but then over the long term, it becomes extremely affordable. We're talking, you know, 10, 15 years down the road. But the tax benefits are incredible. You know, you do have the ability to pull tax-free income, you know, via policy loans. You, you know, with some, you know, folks that like to invest in real estate or in small businesses, the life insurance, those index universal life policies

are incredible because it gives them the freedom and flexibility to borrow money against a policy, but still continue to earn money inside of that policy even after the money's come out. So there are some amazing things that you can do with life insurance has to be structured properly, you have to make sure that you have an advisor that isn't just chasing a commission because that certainly can happen. But as long as it's structured properly and it fits, you know, within the client's plan, absolutely can be just an absolute home run of a strategy. Now, you mentioned something, we don't want to get too much into the weeds, but I want to just clarify something I heard. As cash value grows and you can pull it out.

out, quote unquote, pull it out, take it as, you know, a loan against the policy, you said something to the effect of the money is retained to the policy and can still grow. So you've pulled money out and you're using it for whatever you're using it for it. But yet you said that that money still is in there growing, you know, with dividends and cash. How does that work? Yeah, absolutely. So, yeah, and I'll do my best and I get too far down in the weeds, but it's a concept called arbitrage. And this is, you know, banks have made money with this concept, you know, since the beginning of time, really. So in essence, what's happening is you are borrowing, if you've got cash value inside of the policy and you wanted to pull some cash value out, you're essentially just borrowing against a future death benefit. So those funds that come out, they're being loaned to you by the insurance company, but you still have that cash inside of your policy. Now, the insurance company is going to charge you a rate of interest to borrow

the money, right? It might be 4%, might be 5%. And this is an important concept to understand some of the parameters around this, but let's just say that they charge you 5%, and you make 8% through your interest crediting in the index universal life policy. Well, now you've made 3% on money that you took out to invest somewhere else. And so, you know. And there's a rate of return on that, whatever that that is. Yeah. Absolutely.

Very interesting. Yeah. And obviously, there's a flip side to that, right? If you're borrowing at 5% and you're not credited anything in the policy, then sure. You've lost some cash value. But we're playing averages here. And on average, you're going to earn more money than what the loan interest rate is. But again, it's a concept that, you know,

we've got to walk through that concept with clients and make sure they understand, you know, the nuts and bolts of it. Well, and the thing that I love is you are a trained CPA and you are explaining some very creative ways to help mitigate taxes, not eliminate, not skirt or gray areas, just mitigate taxes using some of these products that a lot of CPAs typically kind of stiff arm and don't embrace. And you're saying they could be helpful. that could. Let's take a look. And it's not the same solution for every single person. You know, is a Roth conversion right for everyone? Nope. Is a universal life insurance policy right for everyone? No. So I think that is just really spectacular that you're able to say, here's some of these tools. Let's just kind of, you know, add one here and do one of those, you know, what if scenarios? What if we put this into your, you know, a financial plan? What would that do? And, okay, well,

here's some options. And then you let the clients decide. Yeah. And I think you just nail or hit on a concept that I really try to stress with clients. And that also kind of frustrates me in our industry a little bit. So, you know, I am in the role that I fill with clients, I am a fiduciary, right? Now, my life would be much, much easier if I just did the same thing for every client all day long, right? If I just said, okay, you've got this and we're going to do X, Y, Z, boom, we're done. then I move on to the next one, my life would be infinitely easier than what it is now. But I'm a fiduciary.

And I think within our industry, understand that that fiduciary rule means that you have to look and consider all options for clients, not just the ones that you lean towards in favor. And I see it all the time, you know, in the investment world or in the insurance world, the investment guys will say, well, insurance is terrible. You should never use it. Don't use an annuity. don't use life insurance. They're terrible. Well, I don't think that's a very fiduciary mindset. If you're just going to complete rule something out without even looking at it or how it plays into a client strategy. And on the flip side, you got some insurance folks that will say, well, investments are terrible. You can lose money and they're up and down. You can't sleep at night. Well, again, if you're going to be a fiduciary, you've got to be a fiduciary.

You've got to look at all options and consider all strategies for clients, not just the ones that you want. to push. And I think that's really important. You know, I really do think so. And I'm not going to mention names, but I was watching TV last night and I saw a commercial from a large financial planning firm. And they used that word. We're fiduciaries and we're different than other people because we only make money when you make money. Something to that effect. And that sounds all wonderful. Like, oh, we care about you fiduciary. And we'll only make money when you make money. But the question that came up to me is, well, what if my portfolio with that company didn't make a dime?

Does that mean they didn't make a dime? No. They still charged whatever their fee is. And what if my portfolio dipped a little, just not even dramatically, but a little. Did they pay me and did they lose money? No. So I think that that fiduciary is huge to take into consideration. But I think that you need to explain things the right way because so many times people hear that little buzzword,

little catchphrasing, they're like, oh, that sounds great. But it really doesn't tell the whole story, does it? No, it doesn't. And of course, I know who you're referring to it, and I won't say names either, but. Yeah. But that's absolutely right. And I talk with folks all the time that say, well, so-and-so recommended this to me. I said, well, have you ever heard of this?

Well, no. And so, well, are they a fiduciary? Well, yeah, they said they were. Well, then how come they haven't talked to you about this when it can. So, you know, the point I'm making here is that there is no perfect investment. It just doesn't exist, right? There's give and take with everything that you do. But you've got to, you know, putting together a financial plan, putting together a retirement

income strategy, it's kind of like, you know, chisling away at a sculpture, right? You just start with this big block and you're kind of chisling away, chisling away. And eventually you get to this thing and it's just, oh, okay, yeah, it's beautiful. I see it now. It makes perfect sense. but it takes time to do that. And like I said, my life would be a whole lot easier if I just said, hey, we're going to pluck everything you got in the market or we're going to put everything you got in this insurance product and let's wrap it up and move on. I go on to the next one.

But that's just that's not the way the fiduciary world really works. Well, and let's wrap up with this thought because you said something else that strikes me personally just as a consumer. Put everything you've got in, Bill in the blank. It should not be everything you've got in. the market. It should not be everything you've got into an annuity. It should not be everything you've got into, you know, a lifester's policy. So having that balanced approach like what we've been talking about here and our conversations, that's what's important. And when you can lay out a sane plan to have a little bucket here, a little bucket there, that's going to give you the most consistent returns to

give you that peace of mind people are looking for. Absolutely. Absolutely. And that's the key. The peace of mind can, you know, your retirement is supposed to be something that you enjoy, doesn't create additional stress, doesn't create additional anxiety. That's what you've spent most of your life dealing with. And, you know, I don't want to create any more for folks. So yeah, no, you nailed it. Don't put all your eggs in one basket. I mean, that's, you know, it all comes back to that eventually.

Well, Chris, thank you so much for coming back on. This has been really helpful to talk about. mitigating tax risk. And if someone is interested in reaching out and connecting with you, what's the best way that they can do that? Yeah, absolutely. So they are welcome. Anybody's welcome to reach out to me on my personal cell phone, 904-3331960. That comes directly to me. Again, 904-333-1960. You're welcome to text or call on that number. Then my email address is CAP at LifeWorks Advocels. advisors.com. I know that's a little bit long, so I'll say it again. C-A-P-A-W-Wordsadvisors.com. And again, email, text, call, whatever is most convenient for you, but I'm always happy to chat.

Excellent. Well, Chris, thank you so much for coming back on. It's been a real pleasure chatting with you again. Absolutely. Thank you, Mike. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www. www. Influential EntrepreneursRadio.com