Click below to listen to Episode 9 – Creating an Income Stream for Retirement

Episode 9 – Creating an Income Stream for Retirement

Learn about replacement retirement income and how to avoid dipping into the principal of your investments early on.

Have you created an income stream for retirement? This is something many of us worry about on a daily basis. In this episode, Bob and Mary Jo discuss different topics surrounding retirement income such as replacement income and how to avoid dipping into the principal of your investments early on, as well as the guidelines surrounding your Required Minimum Distribution (RMD).

They also dive into the various forms of Passive and Non-Passive or Earned Income, Investment and Portfolio Income, and Creating an Income Stream using a “Bucket Strategy”. The Bucket Strategy is based on different Timeframes for needing retirement funds.

HOSTED BY: Bob Barber, CWS® and Mary Jo Lyons, CFP®

Mentioned In This Episode

Christian Financial Advisors
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Bob Barber, CWS®, CKA®
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Mary Jo Lyons, CFP®, CKA®

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EPISODE TRANSCRIPT

[INTRODUCTION]

Bob: Welcome to Christian Financial Perspectives, a podcast where we talk about ways to integrate your faith with your finances. This is Bob Barber.

Mary Jo: And I’m Mary Jo Lyons.

Bob: Are you ready to learn how to apply biblical wisdom to everyday financial decisions?

Mary Jo: Join us as we look at integrating your faith with your finances. If it’s your first time listening, welcome to our podcast, and if you’re a returning listener, welcome back.

[EPISODE]

Bob:
Welcome to today’s podcast about creating an income stream for retirement. We’re going to discuss forms of passive and non-passive or what we call earned income, investment and portfolio income, creating an income stream, and using a bucket strategy. First, before we get to the main meat of the subject today, I always like to start off the podcast with a scripture. Numbers 8:24-26, “This is the rule the Levites must follow. They must begin serving in the tabernacle at the age of 25 and they must retire at the age of 50. After retirement, they may assist their fellow Levites by serving as guards at the tabernacle, but they may not officiate in the service. This is how you must assign duties to the Levites.” So Mary Jo, how about that scripture? It says we’re supposed to retire at 50.

Mary Jo:
Well that would be nice and we better get with it. We’ve said in the past that the Bible actually doesn’t address retirement very often, so this may be one of the few scriptures that actually touches on retirement.

Bob:
It actually is the only scripture that touches on retirement. One of the things that I want to point out here that they’re saying after retirement, they may assist their fellow Levites by serving as guards at the tabernacle. It’s really not retirement from the sense of you just quitting. I think a lot of times that’s the American idea of retirement. I’m not doing anything anymore. I’m just going to go play golf and fish the rest of my life.

Mary Jo:
But I think to have a real sense of purpose and joy that some form of service is going to be in there for most of us. And maybe not initially. Maybe your first few months after retiring, you do want to play golf and fish and relax. But I’m thinking you’re going to need something more to get up every day after some amount of time.

Bob:
Yeah. Fishing and golf only provides so much of, what I would call, a purpose in life.

Mary Jo:
Exactly.

Bob:
Yeah.

Mary Jo:
And , Bob, as we were preparing for today’s show, I came across another scripture that speaks to change. I think certainly retirement is all about change and actually reaching the end of the race and receiving the heavenly prize. So I kinda thought this spoke to our topic today. Pressing toward the goal from Philippians 3:12-16, “I don’t mean to say that I have already achieved these things or that I have already reached perfection, but I press on to possess that perfection for which Christ Jesus first possessed me. No dear brothers and sisters, I have not achieved it, but I focus on this one thing, forgetting the past and looking forward to what lies ahead. I press on to reach the end of the race and receive the heavenly prize for which God through Christ Jesus is calling us. Let all who are spiritually mature agree on these things. If you disagree on some point, I believe God will make it plain to you, but we must hold on to the progress we have already made.”

Bob:
One of my favorite scriptures. I love that one. Thank you for choosing that one, Mary Jo.

Mary Jo:
I think it’s great.

Bob:
I do too, and just because we’re retired doesn’t mean that we quit. I mean we can go into serving in missions and helping others, helping the poor. With all the hurricane, like y’all had a Rockport last year.

Mary Jo:
Yes. There’s so many ways to give back and serve, and it just feels good.

Bob:
It does. You spend your whole life saving for retirement, it seems like. I’ve been saving for retirement a long, long time and I’m not retired yet and I don’t plan on retiring for another 15 or 20 years. We’re going to be talking about if you spent that whole time in retirement, what do you do now? How do you start spending what you’ve saved?

Mary Jo:
Well, that’s exactly it, Bob, and I think the word that we look for is replacement income. Once that employer provided paycheck stops, how do you create your own paycheck in retirement? And maybe we do need a new label, so maybe it’s just after the employment stops. You need to create your own paycheck with others forms of income, forms of passive income. The idea is to generate income to cover your living expenses and so that you can avoid dipping into your principal, at least in the first years, the early years. I think it’s okay to dip into principal over time, and it depends on what your goals and objectives are. That’s very unique for each individual, but it is all about replacing that income.

Bob:
Well, I’ll tell you what I want to emphasize on that part that you just said, avoid dipping into principal. You gotta be careful, very, very careful on that. Just kind of that formula today, if you’re around 60 and you’re going to be retiring at that age, not taking more than about 3% or 4% out of your portfolio a year, but as you hit around 75 you can head more towards maybe a 4% or 5%. When you hit 80, you can do more like 5% or 6% because of the life expectancy and mortality tables. Man, you gotta be so careful about digging into that principal cause once that principal is gone, it’s gone.

Mary Jo:
Welll, and it depends on what your mindset is as far as your objectives. If your goal is to leave a substantial sum to the next generation, you want to be really careful about that, but if your goal is to have your last check bounce, then you might think it’s okay to dip into principal. I think we want to have a happy medium right there.

Bob:
There’s three main types of income that you have when you retire. I like how you broke this down cause I know you wrote this part here, so I’m going to let you share these three.

Mary Jo:
Well you’ve got earned income that comes from working. That requires some level of face time. You’ve got passive income that comes from stock dividends, interest from bonds, savings and CDs, certificates of deposits, oil and gas income from owning mineral rights, and real property income like rental income. Then you’ve got capital gains from your stocks, your real estate, and other investments that play a piece into this. Bob, I was just Googling income and you’ve got the strategy that all millionaires suggest. You should have seven sources of income. Now that a lot of self employed or stay at home moms, that kind of thing, everybody is looking for a way to have multiple streams of income, and I think that’s a good thing. There are many ways to generate passive income.

Bob:
We actually came up with nine different ones, didn’t we? Under the passive income examples.

Mary Jo:
We do. So, we’re going to review all of those.

Bob:
The first one would be social security. And this is something you’ve got to really have an expert, somebody that knows social security, because there’s so much confusion about when to take social security. Also, If you’re married, I emphasize the breadwinner to take social security at a later age because if that breadwinner passes first, then the spouse will receive that part of his or her social security.

Bob:
There’s just so many strategies, and everyone’s situation is different. Your ages are different. It definitely pays to talk with a professional regarding that so you don’t make a costly mistake.

Bob:
Well, the second one is the pension plan. That’s pretty much disappearing today. There’s few that still have pension plans, especially if you’re under 40 or under 45.

Mary Jo:
It’s going by the wayside. If you’re a teacher or there are still some professions where it’s fairly common, but they’re few and far between. The one thing that you have to be aware of is the huge risks with pension income. You have to look at the credit worthiness of the provider. Think of all those municipalities across the country. Maybe Detroit, for example, and how they’ve gotten into trouble with their tax flow and they’re not able to guarantee those pensions and pay those pensions to their policemen and their firefighters. You’ve got to be careful there. If you’re depending on that income, how secure is it?

Bob:
Yeah. Do you remember the GM debacle? And how that whole pension plan just went broke because it was so top heavy.

Mary Jo:
And here in Houston, remember Enron? That paints a whole visual.

Bob:
We’re located in New Braunfels, which is so close to San Antonio, which is a huge military area and retirees, so there’s the military pension. I’m not too worried about that because they have the full faith and power of the government backing that one up. You go North of New Braunfels and we’ve got our capital for the state of Texas. A lot of government pension there. The pension plans with the corporations, those are really disappearing because the corporations don’t want to take the risk of having a pension plan. They gotta guarantee yet.

Mary Jo:
That’s right, and it’s a huge obligation for the employer and it can be financially draining. So we also have interest and that’s interest off of your bonds. We used to do a lot of bond ladders, but now that interest rates are so low, that’s not such a huge component of a portfolio, but it certainly plays a part. We have a lot of people with certificates of deposits and they get their interest off those. If you are loaning money to others and there’s interest that comes from those, interest income is a big one.

Bob:
The CDs. We mentioned the ladders. You go and you look at a five year CD. The rate of return is going to be higher than a four year CD than a three year CD than a two year CD than a one year CD. We’re going to get into what’s called the bucket strategy later in the podcast today. That’s the first three: social security, pension, interest, and then we have the fourth one, which is dividends. That’s from stocks, corporations that are not necessarily growing as much now, but they’re able to pass back profits from the company to the stock holders.

Mary Jo:
We are in Texas and we have a lot of listeners that do have royalties that they get income from – mineral rights that are on their property that they own land. It’s actually out in the country, so that’s a big part of our market here and certainly a source of income. What is the next one?

Bob:
The next one is annuities. That’s where a lot of people will purchase an annuity. A lot of the annuities have what’s called a guaranteed income benefit or they can annuitize an annuity. Now, I just want you to understand that’s based on the strength of the annuity insurance company, so you want to make sure that you’re looking at an A rated company that can back that up with that guarantee, but that is definitely another form of passive income.

New Speaker:
Bob, I was meeting with a client yesterday and we were talking about annuities and they were kind of asking my opinion on it. They had a mishmash of one scattered around that they did after 2008 when the market was so volatile, and they were looking for some level of security. I think that it’s important for everyone to have some stream of income that they can’t outlive. For some people that social security, for some people that’s pension, and for some people, some of the time, annuities make sense. But those situations are fairly rare and you have to look at those. They are very expensive and the person making money on the annuities is generally person that sells it to you. That’s a whole other conversation and one we’re going to have on another podcast. I wanted to touch on that for just a minute.

Bob:
So be tuned for that. We’re going to do that podcast. Everybody always got so tickled at my article that I wrote on this called “The Good, The Bad, And The Ugly Of Annuities” for the old movie with Clint Eastwood in it.

Mary Jo:
There you go.

Bob:
That’s six of the passive income examples. Number seven is just savings. Very similar to CDs, but that’s just a savings account that’s generating some interest. Today’s savings accounts, though, pay so low.

Mary Jo:
Yes.

Bob:
You’re going to be eating into the principal

Mary Jo:
And then we’ve always got alimony. Some of our listeners benefit from alimony. That may or may not be a permanent situation, but sometimes it’s temporary so you want to give some thought to that as to how it plays into your income. And then finally, Bob, what’s the last one?

Bob:
The last one is rental real estate income. We had a podcast just on that recently. Before you go out and buy rental real estate, you definitely want to go back and listen to that podcast where we talked about the benefits, but there’s also cost associated with rental real estate income.

Mary Jo:
I want to back up just a minute. We’ve talked about all the various types of income, but I want to take a minute and clarify between unearned and earned income. I think there might be some questions out there on that. Unearned income, it includes things like annuity payments, pension income, distributions from your retirement accounts, capital gains, interest income, dividends, passive income generated from rental real estate, alimony, the stock dividends and the bond interest, all of which we were talking about, but earned income comes from the actual work that you perform. In order to fund an IRA or a Roth IRA, you have to have earned income and also to have an employer sponsored retirement plan such as a 401k or 4013b. That comes from earned income. So, little differentiation there, and I thought it was important to share that with our listeners

Bob:
As we’re talking about income in retirement, many people will go back into the workforce. I’ll raise my hand to say that if I were to retire, I think I’d want to go work over at Home Depot or Lowe’s because I’m always in it. It’s funny, Mary Jo, we actually have many clients that they’ve retired and they’ve got all these sources of passive income, but then they also have some earned income from that very thing. They work at Lowe’s or they work at Home Depot. I mean I have actual clients, several of them that work at Home Depot or Lowe’s. Then there’s others, sometimes, that will just go back into the marketplace. I know I have some clients that have retired from phone companies. They’ll go back as a part time consultant and have some earned income there.

Mary Jo:
Consulting is big because you become self employed. There’s all kinds of write-offs you can do, and it gives you some flexibility. A lot of professionals or engineers, those types, go back into consulting a lot. I know some nurse clients, they’ll go back to just nursing one or two days a week just to keep their fingers in it. The beauty of what we do, we can do this from anywhere with the miracle of technology today. I don’t look at myself as planning to retire.

Bob:
I’m noticing more and more people that are retiring plan on going back into the workforce but just not in the capacity that they were. They don’t want to be fighting that traffic. It’s going to be more of a part time type of scenario.

Mary Jo:
And when we talked earlier about active or earned income, we went through some of those examples. You’ve got wages, salaries, tips, other taxable employee pay, certainly net earnings from self-employment fall into this bucket if you will, if you own or operate a business, any of that income place. There is another interesting one that falls into this category, and that’s military combat pay. It’s tax exempt but it is considered earned income for the sake of the earned income tax credit. I know in San Antonio, as you mentioned, that’s a very big military community. I’m sure that some of our listeners do have combat pay.

Bob:
I don’t know about retirees, though.

Mary Jo:
No, probably not.

Bob:
All right so let’s keep going because we’ve got a lot more to cover. What’s next, Mary Jo?

Mary Jo:
We’re going to be talking about our bucket strategy, which is a great illustration and they can ask for a copy of that as well. We’re going to get into that in just a minute, but as we’ve been talking about income, there’s something from a scripture perspective that I think is important. You worked hard for this money, and so now it’s time for your money to work hard for you.

Mary Jo:
And this makes me think of the book of Numbers 6:24-26, “May the Lord bless you and protect you. May the Lord smile on you and be gracious to you. May the Lord show you his favor and give you his peace.” And I think having a plan for that income is a way to really have peace as you approach the years after your work life.

Bob:
So next we have investment in portfolio income. This refers to those assets are going to benefit you from what we call capital appreciation. This is like from equities and mutual funds and stocks. And this is going to be types of investments that you hold. You’re not bringing the income off of them right now, but you’re waiting for that capital appreciation for later. Real estate is another example of that – land and buildings – goodness land here in the Central Texas region where we are, Mary Jo – it seems to be increasing by 7-10% a year. Collectibles, precious metals, and even royalties can have capital appreciation in them.

Mary Jo:
Absolutely, and Bob, when it comes to creating an income stream, there are some, I guess best practicees that we to remind our listeners about. We touched on social security and how important it is to maximize your benefits when you are deciding on what strategies, when to start, and when to have your spouse start. You want to consider your life expectancy and any other sources of income you may have and when those start. So there’s a lot that plays into that. What’s another best practice?

Bob:
Oh, well this is considering your spending shifts. We call this the go-go years, the slow-go years, and then the no-go years. When you’re thinking about an income stream, it’s not necessarily just going to be the same amount every single year during your retirement. First, you’ve got to compensate for inflation, but right when you retire, usually we call that the go-go years. That’s going to be for the next 10 years or for sure, many times, the next five years. You’ve got pent up demand. You’re wanting to go on that European trip. You’re wanting to maybe go visit Israel. You’re wanting to do those cruises. That’s many times the most expensive time of your retirement. Then comes the slow-go years where you’re like, I’ve traveled all I need to. We’re happy being around our home and around familiar places.

Mary Jo:
You want to do more fishing.

Bob:
There you go, and then you have the no-go years, which can be an expensive time again. That’s usually just the last three to five years of your life, and that’s because of medical costs, so you’ll have the peak of spending. Then it goes down and then it will go back up. Does that make sense?

Mary Jo:
Totally does, Bob. I don’t think I want any of those no-go years.

Bob:
I don’t either. None of us do.

Mary Jo:
Another thing to be aware of is to be tax aware. You want to build tax efficiency into your strategy. I remind clients that those first few years when they separate from their employer, but before the age of 70.5 when they have to begin taking money out of their IRAs, these are generally the lowest tax bracket years, the lowest earning years that they’re ever going to have. So, you want to capitalize on that and take money from very tax efficient sources. That’s something we talk a lot about with our clients.

Bob:
Another thing is as you’re taking money out, you’ve got to be very careful about your spend down rate. Like we mentioned earlier, around 3-4% is considered doable, depending on your age. That can go higher, but when we say 3-4%, we’re talking if you retired around 60/65 – 3-4% all the way up to 70 – once you get above 70/75 you can go to a more like a 4% or 5% pay out. So, just think of it this way. If you retire with $500,000 and you’re 60 years old, you shouldn’t be taking out more than about $15,000 – $20,000 a year from that portfolio. Now, if you still have $500,000 and you’re 75, you can take more like the 5% or 6%, which is around $25,000 – $30,000 a year. But that needs to be looked at very closely on at least an annual basis, if not more, to make sure that you’re not spending down your savings cause you don’t want to end up with no savings with another 10 years to go in life.

Mary Jo:
That’s right. You don’t want any life after and no money.

Bob:
Right? Well no, wait a second. We don’t want to tell anybody if you don’t have any money, we still want you to be around.

Mary Jo:
And the next one is you’ve heard his talk about required minimum distributions and again that’s something you have to take out of your tax deferred accounts after the age of 70.5. A lot of our listeners don’t need the income from their required minimum distributions. You can do things with that, like give it directly to charity, and you’ll get a tax advantage for doing so. We’re going to talk a little bit more about that, but you certainly want to have a strategy in place, whether you need that income or not. It’s very important.

Bob:
Yeah. So, if you’re retired and you’re above 70.5, You definitely want to keep listening to the podcast because just in a few minutes we’re going to get into talking all about what we call RMDs or required minimum distribution. The next area is creating a laddered bond or CD portfolio. This is where you take out say a 10 year bond and an 8 year bond and a 7 year every two or three years all the way down to just a two year maturity. That’s what we call a bond ladder. You do the same thing with the CD and as these come due, then you roll them over. That works very well with a retirement income strategy.

Mary Jo:
Exactly, Bob. And then we also want to talk about risk tolerance and how that changes over time. So, when you’re talking about your investment portfolio and your savings, typically the of thought is that you want to become more conservative as you get closer to needing that money, and that probably used to be very true in life expectancy. We weren’t expected to live past 75, but that sure has changed when life expectancies now are 95. Retirement years could be 30 years, so you still need growth on your money. Being too conservative can cost you, so you need to think about that, and that needs to change over time.

Bob:
Oh, we’re just about to talk about the bucket strategy. We’ll get into that in just a minute here about how to utilize that risk tolerance. Then number 8 of this 9 areas of creating an income stream is you want to reallocate and rebalance your income stream portfolio on a consistent basis so that you don’t get overloaded in one area.

Mary Jo:
As the market does its thing and it moves depending on what’s happening in the economic cycle, certain types of investments will do better than others. For example, we’ve been in a period of tremendous growth. So, in your portfolios, your growth funds, your large cap growth funds, those who have doing pretty well, sometimes international investments do well. You want to continue to keep those rebalanced and reallocate so that you’re in line with your risk tolerance.

Bob:
Now, an experienced registered investment advisor like we are here at Christian Financial Advisors, we do that for you so you don’t have to worry about that so you can enjoy retirement.

Mary Jo:
That’s right. Let the professionals help you with that.

Bob:
And then the last one, I’m gonna let you share that one, Mary Jo

Mary Jo:
Separate needs from wants. And I think, Bob, you had an ulterior motive with that. So, are you telling me that shoes are needs or wants?

Bob:
It depends on if their tennis shoes or if it’s that 30th pair of dress shoes.

Mary Jo:
Ah, okay. So, we’ve talked about the various types of income and a lot of times it’s good to have your annuity income or that income stream that you can’t outlive. Have enough of that that’ll cover your fixed expenses. So that’s generating that income that you can’t outlive, and then you’ll use your other sources of income to cover your discretionary spending.

Bob:
Okay, so we’re going to be talking about a strategy now that we use here a lot at Christian Financial Advisors called the bucket strategy. The bucket strategy is something that we like to use here at Christian Financial Advisors because we look at a portfolio and divide it into four different buckets.

Mary Jo:
Bob, I always like to stop here. I think that this is a wonderful visual. I can’t think of a better visual to illustrate our point, but our clients work hard for their money, so I always want to apologize that we put it in a bucket, but bear with me.

Bob:
These are buckets that are growing. Let’s try to picture this in your mind. And Mary Jo, I’ve used this for so long, I don’t even have it in front of me because it’s just so natural to me from building this thing. Think of four different buckets, and one bucket is going to be a conservative bucket. This is the bucket that is going to be making the lowest return, but it’s also going to have the least risk and this is the bucket where you want to take your income from. You don’t want to take your income from a balanced bucket, a growth bucket, or an aggressive growth bucket because those are much more volatile. Look at it this way. Let’s say you have a $1 million portfolio. So, we have $1 million portfolio. We’re going to take off, like we mentioned earlier, 4% a year, so it’s going to be $40,000 a year. We take $40,000 we multiply that times 4 and we would take $160,000 and put it in that conservative bucket. Now, am I coming across clear on this? I want to make sure.

Mary Jo:
Oh, I think so. And you think of it that that’s the bucket you actually put the spicket on. So that’s where the income is going to come from.

Bob:
Because that’s your most conservative return. We don’t want to take everything in retirement because like Mary Jo said earlier, you could be living 25 or 30 years during retirement.

Bob:
We take that four or five years of income, put it there. We take another four or five years of income, put it in the balanced bucket. That’s going to be the money that you’re going to use after you use up the conservative bucket, and then we put the remaining amount of money in a growth and aggressive growth bucket that’s not going to be used for 9, 10, 12, 15 years ou. Now, during this time while you’re taking this money out, we shift these buckets around. We take profit off of the growth bucket in the aggressive growth bucket. Go put it in into the balance and put it into the conservative, so it’s not like you’ve got to completely run through your conservative bucket, but that’s the bucket that you want to be taking money from because you never want to be taking money from a growth or aggressive growth bucket because those are the most volatile. They are going to be the most up and they’re going to be the most down, and you don’t want to be taking money out when you’re down.

Mary Jo:
One thing I think that is important for us to add is this is a concept, but it’s very unique given every situation and every client is unique. They have their own preferences, their own risk tolerance, and their own financial situation. Someone who has more money than they’re going to need to live on, that aggressive bucket, that’s a great way to grow money for giving to charity or to pass on to the next generation, but if you’re going to need that money for your care, for example, I don’t think it always pays to swing for the fences. I’m a big fan of that balanced bucket for the majority of us. If you look at historical returns over a 30 year period, an aggressive allocation doesn’t always outperform. I think taking that middle of the road approach for the bulk of your portfolio makes sense for most of us. Most of the time.

Bob:
I want everyone to understand that none of these strategies that we’re talking about will necessarily apply to you. These are individual strategies in which you need to get with a qualified financial advisor, if not us, then someone else that has a lot of experience and has been around a while and is a fee based advisor. We like to emphasize that so they have a vested interest in you, because you’re the one paying them, not some big company paying them. Every one of you that are listening to this podcast, please understand that when we talk about these strategies, you can’t just take these strategies and apply them to you specifically because you may be different.

Mary Jo:
That’s right.

Bob:
Is that the way to say it? Is that the right way to say it? Cause we want everyone to understand it because everybody’s an individual.

Mary Jo:
Very much so. When you’re in this phase of life, seeking that professional advice is so important. And it reminds me of a scripture from Proverbs, “Listen to advice and accept instruction and in the end you too will be wise.”

Bob:
So we’re coming to the last part of the program. We’re going to be discussing a little bit about RMDs, required minimum distributions. Mary Jo, we serve a lot of retirees here at Christian Financial Advisors, and they’re always concerned so much about their RMDs. What am I going to do with that? Where’s that going to go? Because a lot of them are not taking money out of their IRAs. They have so many other sources, especially in our area. We have a lot of military retirees and a lot of retirees, actually, they retire from Houston and come over here to New Braunfels. A lot of them work for the larger oil companies, and they have that pension, so they have enough from their pension, enough from their social security, maybe outside investments. They don’t even need to touch their IRAs, but they get really concerned as they get towards that 70.5. What am I going to do with the RMDs?

Mary Jo:
And there’s all kinds of strategic things that you can do. When it comes to the IRS mandates, you take those required minimum distributions out of your traditional IRAs and your employer sponsored retirement accounts. But there’s all kinds of creative things you can do for it. That reminds me of one key point. If you are still working, you don’t have to take it out of your current employer’s plan, but you would have to take it out of other IRAs that you might have or other rollovers from other employer plans from in the past. But for your current plan, if you’re still working, you may be able to avoid an RMD on those accounts.

Bob:
RMDs offer a really great giving strategy in helping your church or helping those serving in missions. We emphasize instead of taking the RMD yourself, if you don’t need it, taking that RMD and actually using that as a tithing strategy to your church. So, here’s an example. Let’s say you’re going to tithe $10,000 next year to your church, and your RMD is maybe right at $10,000. You could take that RMD and give that from your IRA, give it directly to your church, therefore bypassing that happened to come to you and declaring that as income. We know now with the new tax laws that if you’re married and you have itemized deductions that are over $24,000, you’re not going to get to deduct that.

Bob:
It makes so much sense to go directly from your IRA, the RMD from your IRAs and qualified plans, to your church or to your mission that you care about, and instead of giving cash from on hand, because that may not be deductible.

Mary Jo:
You can certainly, as you said, Bob, mention it as part of your tithing, but you can put it as far as your planned giving strategies, whatever those may be. We’ve talked a lot about RMDs. What are some ways to take those distributions out of the accounts, Bob?

Bob:
Well, you can take it as a onetime distribution. That’s the way the majority of our clientele does, actually. They take it as a onetime distribution. You could take it as recurring distribution. If it was $3,000 a year, that’d be $250 a month. So you could take it like that in monthly distributions. That check can be directly sent to you or it can be electronically transferred to your bank. So, those are some ways to withdraw your RMD.

Mary Jo:
If your annuities are set up in a retirement account such as an IRA, you might’ve heard the term, are they RMD friendly? If you have a recurring payment coming, you’ve annuitized your annuity for example, and turn it into a lifetime stream of income. Those are often deemed to meet the required distribution amount. You certainly want to talk with your advisor and make sure that you’re in compliance there.

Bob:
And we make sure every single year if the RMDs not been taken, with today’s technology, our system tells us. If this person is above 70.5, they’ve got to take their RMD. We go through, and it tells us who’s not taken it. We’ll make sure and contact you before the end of the year so that RMD requirement is taken. By the way, I want to mention something else here that really confuses people about RMDs, Mary Jo. Some people will have two or three different IRAs. They think that they’ve got to take an RMD from each IRA. Well, you can add the total of those IRAs and take the RMD from just one, but it’s gotta be based on the total of their IRAs. Do you find confusion in that area too?

Mary Jo:
Absolutely. So, you do have to take it across the tax code. Roth IRAs do not require minimum distribution. So, don’t think about your Roth. All your traditional IRA, total that up, and you have to take a certain amount and it can come from any one or a combination of those IRAs. But if you have old employer plans, you also have to take it off. So, if you have 403b’s, 401k’s, those will require their own distribution. Before we wrap up on required minimum distributions, I think we owe it to our listeners to talk a little bit about some of those rules and remind them that they have to begin taking it out after the age of 70.5. So, you want to think about where your birthday falls and make sure that you space it so that you don’t have to necessarily take two distributions in one year. Sometimes that can impact people at the age of 71, so you might want to take it a little bit earlier and talk with your advisor about that situation. Also, you want to make sure that you do meet the deadline. You have until December 31st each year to take your required minimum distribution. But if you miss it, the penalty is very steep. If you take less than your required minimum distribution, it’s 50% of the amount that you haven’t taken on time. So that is a pretty steep penalty, but you want to make sure you’re in compliance. And also, Bob, we had some key takeaways on this that we wanted to remind clients of.

Bob:
I’d like to close today with Proverbs 15:22, “Plans fail for lack of counsel, but with many advisors, they succeed.” We’re calling this podcast income in retirement, and if you want a copy of our notes that has all of this information in it, feel free to give us a call or even go to our website at christianfinancialpodcast.com. As we come to the end of the program today, we want you to understand that there’s so much information that we’ve been giving, but we’re here to help you and not only just us, but we rely on counsel ourselves so that we’re making good decisions, and we’re all in this together

Mary Jo:
Very much so. I think it’s been a great show, Bob. If you have any questions, again, don’t hesitate to reach out to us.

[CONCLUSION]

Mary Jo: You’ve been listening to Christian Financial Perspectives. Join us as we explore more about how to apply biblical wisdom to your financial situations.

Bob: To make sure you don’t miss any of our podcasts, you can subscribe to Christian Financial Perspectives on iTunes, Google Play, or Stitcher. To learn more about integrating your faith with your finances, visit out website at ciswealth.com or call 830-609-6986.

Mary Jo: That’s all for now.

[DISCLOSURES]

Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors, a registered investment advisor.