What You Need to know about Taxes and Technology

Mike Lester

by Mike Lester

Jan 25, 2021

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Announcer (00:02):

Welcome to the Retirement Wealth Podcast. Our goal is to help those retired or soon to be retired investors make more informed financial decisions and live an enjoyable retirement.

Announcer (00:13):

Our host, Mike Lester, is the founder and CEO of Talon Wealth Management. Mike is an investment advisor representative of Retirement Wealth Advisors, Inc., an SEC registered investment advisor. Thanks for joining us today, and let’s get started.

Kristen (00:31):

It is now for sure that Elon Musk, the founder of Tesla and SpaceX, has left California for the Lone Star state. He said his move is mainly because of COVID restrictions; but knowing how business savvy he is, it’s likely that this has more to do with the difference in state taxes. He told the Wall Street Journal’s CEO Council recently …

Elon Musk (00:53):

There’s a lot of things that are really great about California. Honestly, it’s the biggest economy in the country, most number of people. Going back to the sports team analogy, if a team has been winning for too long, they do tend to get a little complacent, a little entitled, and then they don’t win the championship anymore. California’s been winning for a long time, and I think they’re taking them for granted a little bit.

Kristen (01:12):

So what does an entrepreneur of his caliber believe the role of government should be when it comes to American business?

Elon Musk (01:21):

A lot of the time, the best thing that government can do is just get out of the way.

Kristen (01:22):

Yes and amen, please.

Mike Lester (01:24):

That’s a very conservative philosophy.

Kristen (01:27):

I know.

Mike Lester (01:27):

Let government get out of the way. That’s not a very liberal philosophy.

Kristen (01:30):

Maybe he’s a libertarian. I don’t think he is,-

Mike Lester (01:32):

Who know?

Kristen (01:32):

… but that’s a libertarian mindset. But Mike, it’s not that simple. We’re also not billionaires listening today. We’re on conservative talk radio stations. Yeah, we don’t want to pay a lot in taxes, but we can relate to the frustration of local and federal taxes chipping away at our hard-earned money.

Kristen (01:50):

You’re a financial advisor, you’re a fiduciary, you have accountants and CPAs on the team. What can we do to make sure that we aren’t paying more than our fair share when it comes to our assets?

Mike Lester (02:02):

Well, again, this example of Elon Musk moving the company. I remember very specifically, I’m sure some of our listeners do, when he made that statement to the State of California, “Hey, listen, I’m going to have my workers go back to work.” I’m paraphrasing here. I don’t have the exact quote. But it was basically, “We’re going back to work; and if you don’t like it, I’m going to move my whole company somewhere else.” Turns out, well, he’s moving the company to Texas, which makes sense if you take a look at the tax situation.

Mike Lester (02:28):

It’s continually getting worse. We’re dealing with it in California, for our clients in California. There’s a lot of stuff out there right now bouncing around, not just increasing taxes, but also making those taxes sticky.

Mike Lester (02:43):

So even if you go, “Hey, listen, I don’t want to pay taxes in California, so I’m going to move over to Nevada or I’m going to move over to Texas or I’m going to go somewhere that doesn’t have state taxes,” what they want to have happen is they’ll continue to tax your income in the new state for the next 10 years.

Kristen (02:59):

I read that. How is that even legal?

Mike Lester (03:01):

I just think it’s one of those things where they want to make it legal. In my opinion, if the wrong people are able to make that legal in California, it’s going to be very, very painful. Part of it is trying to encourage people not to leave because, hey, why leave? You’re still going to have to pay the tax anyway, so you might as well stay. So that’s one of the incentives.

Mike Lester (03:19):

The state is getting obviously hurt by individuals moving. If you’re not really making money, then you’re not really paying taxes, you don’t really have a reason to move. But if you’re making good money or you’re a big corporation like Tesla and you’re making great money and you’re looking at what it’s going to look like tax-wise for you, it just doesn’t make good business sense or personal sense to stay in the state no matter how much you love it. There’s just so many things going on in California and in other states.

Mike Lester (03:44):

That is why, Kristen, you brought up the reason that we have accountants on staff and the reason that a big part of our financial planning process is the tax planning is because it really is a critical role. I realize there’s a lot of financial advisors out there that, frankly, will just give investment advice, take their fee or commission, and then move on. But that’s just one piece of the entire puzzle.

Mike Lester (04:07):

The other pieces are different types of money that you have. You have IRA money, you have maybe trust accounts, individual accounts, joint accounts. That’s different money. Or you may have Roth money, money that’s never taxed. The way the money is taxed when you go to access it as income is really, really important in the financial planning process. Then it’s also very important as far as how it’s invested, how it’s going to grow.

Mike Lester (04:28):

Most portfolios should be diversified portfolios, but that does not mean that your IRA account should be invested exactly the same way as your individual account or trust account or exactly the same way as your Roth account. It’s different types of money that is taxed at different rates or different ways when it comes back out, and you need a very, very specific plan to be efficient there.

Mike Lester (04:52):

I’m not at all surprised that Elon Musk is moving the company to Texas. There’s plenty of workers there, there’s low taxes there, and I’m sure it’s a good move for the company overall. It’s a huge loss for the State of California; but at some point, as these losses start to stack up, what I’m hoping eventually … Again, it’s hopeful. It’s not probable. But what I’m hoping is at some point the state realizes, “Hey, listen, we just can’t tax everybody into oblivion. They’re all going to eventually leave, and then there’s no tax base anymore.”

Mike Lester (05:20):

So we got to be careful there; but for now, let’s just focus on financial planning, helping individuals get efficient in their portfolio, whether you’re retired or very, very close to it. Just make sure you’re in a good spot here for the beginning of 2021 because it looks like the economy is going to do very, very well. You want to be well-positioned for that, and there are certain investments … When stocks are doing well, there are other investments like bonds that are likely to do poorly. Understand your allocation and how it’s likely to react. We can help you with that.

Mike Lester (05:48):

But at the same time, if you’re retired or very close to it and you’re looking to make that transition to retirement, if you don’t have one right now or you’re not confident in your current plan, give us a call. We’ll do a financial plan. We call it a complete financial plan for you. It’ll show you all the steps you need to take and how you need to be invested to be successful in retirement. Very simply, we define success as being able to maintain your current standard of living, adjusted for inflation and taxes moving forward, in retirement,

Kristen (06:13):

Undefeated boxing legend, Floyd Mayweather, is coming out of retirement and returning to the ring in an exhibition fight with YouTuber Logan Paul, who apparently boxes on YouTube to become famous. It’s a new way of getting into the industry. This is happening in February. Reuters’ Adam Reed fills us in.

Adam Reed (06:32):

Floyd Mayweather, the undefeated boxing legend, is coming out of retirement again, this time to fight the controversial YouTube personality, Logan Paul. It’s an exhibition fight, and the pay-per-view event is yet to have a confirmed location, but it’s scheduled for February 20th with prices to tune in starting at $24 99.

Adam Reed (06:50):

Mayweather’s 2015 fight with another boxing great, Manny Pacquiao, holds the pay-per-view record of 4.6 million buys, contributing to the reported $180 million the American made on his way to winning.

Kristen (07:05):

By the way, anyone with a British accent always sounds really smart. Number two, Mayweather, he doesn’t need the money, but he’s certainly excited about the challenge. That’s how athletes are.

Kristen (07:16):

But Mike, your clients aren’t typically sports stars or celebrities. Do regular people here in the US, because you’ve got offices from coast to coast, do they ever choose to come out of retirement? Or is this mainly a first-world celebrity dilemma?

Mike Lester (07:31):

Well, I think obviously we’re seeing it more first world. If you were at one point in time a few years ago as famous as he is, and you’re able to make as much money as he is just to show up for a fight, can’t blame him for doing it. It’s nice to be in the spotlight again, and it’s easy money in some ways. It’s not easy to get punched in the face, but it’s easy money, right?

Mike Lester (07:47):

Our clients, like you said, typically aren’t in that situation, but a lot of them will choose to go back to work either because they get bored or, frankly, they just need to go back to work financially. There’s nothing wrong with that.

Mike Lester (07:59):

As far as need to go back to work financially, or maybe it just doesn’t make sense to retire yet, we’re seeing a lot of individuals, primarily because of COVID, lots of companies cutting back. Pretty much every airline for obvious reasons has been cutting back, and not just on pilots, but other staff. We’ve been talking to a lot of individuals in that situation where they’re being offered more or less a package. Say, “Hey, listen, if you’ll accept early retirement, we’ll give you this much money on the way out the door. We’ll extend your health benefits for a certain amount of time.” If there’s a pension involved, that’s part of the conversation.

Mike Lester (08:31):

But there are a lot of individuals taking a look at that, going, “Hey, listen, I’ve been doing this 15, 20, 30 years,” or sometimes more. “Maybe I’ll just take that buyout. It’s a good deal, and maybe I’ll go get another job, start a second career as I’m finishing up retirement here.” We’re seeing that. Again, airlines, engineering, I think, is a big one. I’ve been talking to a lot of engineers. I know Lockheed Martin’s been doing layoffs. We work with people that work for the amusement parks, Disney, Universal Studios, you go through all of these industries that are having cutbacks and early retirement. I’d say probably last year, 2020 and going into 2021, it’s a very, very common conversation that we’ve been having.

Mike Lester (09:12):

Bottom line, what we’re doing is sitting down. So if somebody’s listening right now and they’re in this situation, Kristen, what we would encourage you to do if you gave us a call is just collect that benefits information, all the information that they’ve given you and told you about what the offer is, and you’re wondering if it’s going to be enough to retire or what you should do with regards to the offer, what elections you should take. We’re going to base it all on what you’re looking to accomplish moving forward, compare it to your overall financial plan. But whether that’s a sit-down at one of our offices or whether it’s a phone call, we can build out a financial plan for you based on the benefits that they’re offering and the buyout or pension or how much you’ve got set aside in retirement. We’ll start there, build out a complete financial plan for you.

Mike Lester (09:52):

Kristen, at least for the people that we’ve done this for over the years and they’re here recently, I get a lot of satisfaction out of the peace of mind they have because they had a lot of questions about what a transition like that would look like that for them. Once we put it on paper and they understand it, it’s really, really helpful.

Mike Lester (10:08):

If you’re interested or if you’re in that situation, whether it’s a layoff or a furlough or, frankly, you just want to go ahead and retire, we’ll do the analysis of your current portfolio, help you get more efficient, and we’ll also do the complete financial plan for you.

Kristen (10:20):

Mike, how do you help people over the age of 50 figure out where to invest their hard-earned savings that they’ve socked away all these years?

Mike Lester (10:30):

Obviously, there’s a lot of different ways. It starts with finding out what somebody is looking to accomplish long-term. If you’ve got money sitting in cash right now, so maybe it’s at the bank in a savings account, maybe it’s a CD, just some liquid investment that’s considered safe, ensured at the bank, what we all know is you’re not getting paid anything on that. You’d be lucky to get 1%. But if you were earning 1% on your money long-term and you had expenses, unless you just have a ton of money in the account and 1% gets you where you need to be, you’re not going to have the income that you need off of your money. Your money is not really working for you. Besides that, it’s just not a responsible way to invest. Once we figure out where you need to be as far as average rate of return to accomplish your goals, I think that’s a good starting point.

Mike Lester (11:15):

We’re going to look at all of the investment options that are available. Obviously, cash isn’t going to get us where we need to be. But if we’re talking to a more conservative investor that wants to make sure that they have safety or relative safety in their investments, but they want the highest rate of return that they can get. But at this point, we’re going to have to look at other fixed options. What options are out there that pay more? If we went to bonds, bonds aren’t paying very much. The yields are very, very low. The Fed isn’t likely to raise interest rates any time soon. They’ve already forecasted that they probably won’t do it until 2023, although I think that could change with all of this spending from stimulus. But the first thing that we have to do is just find out what you’re looking to accomplish and then help people make informed decisions.

Mike Lester (11:56):

I’d say for people out there that are in cash right now, they’re probably a little bit leery of putting it in the market. They feel like they’ve missed the boat. The markets have gone up really fast. We’re above 30,000 on the Dow Jones Industrial Average. Probably the reason the money is still on the side is they’re waiting for the big drop. Well, it’s my job to forecast what is the probability of a drop now or crash versus later? I think the probability of a crash here in the near future is pretty low. We’ve got super low interest rates.

Kristen (12:25):

I like hearing that, number one. Okay.

Mike Lester (12:27):

Yep. We’ve got vaccines. Not just one, but several and more on the way, and they all have a very, very high efficacy rate. More and more people are being vaccinated. We have stimulus from the government coming in. On top of that, just a lot of frustration, Kristen. People are just tired of not being able to go out. Just imagine this world where … It’s probably several months away, but most people or most people that need it have been vaccinated. Most people have money in their pocket because the government just gave it to them. Interest rates are very low. Suddenly you can go out to eat, you can go to the movie theater, you can travel more in the future. Once all of this kicks in, it looks very, very good for the market.

Mike Lester (13:03):

I would say if you’ve got money on the sidelines, we should probably have a conversation about … You don’t want to just go invest it anywhere. They are going to be sectors of the economy that aren’t going to do well. But even if markets are over-bought, bond yields are so low that that’s such a horrible alternative. People are likely to continue to buy stocks. Other countries are likely to keep investing in the US stock market. So it’s probably a pretty good place to be invested. But that being said, invested in the market with some protections in place, invested in the market with a willingness to get back out.

Mike Lester (13:33):

Or maybe you’re too aggressive. The opposite can be true in a portfolio, Kristen. Maybe you have target date funds, something like the 2035 Fund or the 2045 Fund. Those are probably too aggressive with no active management at this point in time. They’re probably going to have some positions that aren’t likely to do well. Let’s just be very, very focused on how the portfolio is currently built, where you’re currently invested, whether it’s cash, whether it’s stocks. Let’s find the most efficient way to invest that money, meaning highest rates of return, least amount of risk at least in the near future, I’d say maybe next six months, I’m pretty optimistic. I’m not willing to forecast beyond that, Kristen. But if anybody who wants to come sit down and take a look at where they start kicking off 2021 and how to have an efficient portfolio and a written financial plan, we’ll do that for you complimentary.

Kristen (14:19):


Announcer (14:21):

If you would like to have a comprehensive financial plan and an analysis of your current portfolio, go ahead and visit our website at retirement.tips/plan, and we can do that for you complimentary.

Announcer (14:37):

Thanks so much for joining us on today’s show. Be sure to subscribe to our podcast. Visit our website at retirement.tips for more free retirement planning and investment resources. Thanks for tuning into today’s show, and we’ll see you next time on the Retirement Wealth Podcast.

Announcer (14:54):

Exposure to ideas and financial vehicles discussed should not be considered investment advice or a recommendation to buy or sell any financial vehicle. This information should not be considered tax or legal advice. Individuals should consult with professionals specializing in the fields of tax, legal, accounting, or investments regarding the applicability of this information to their situation. Past performance is not a guarantee of future results. Investments make fluctuate, and when redeemed, may be worth more or less than originally invested.

Mike Lester

Mike Lester

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What You Need to know about Taxes and Technology