Archives for November 2024

One thing I run into frequently — both working with clients and via correspondence with readers — is people who have financial goals that, to put it bluntly, are not very good.

And to be clear, I just don’t mean that they’re goals I wouldn’t pick. I get excited about spending money on spring loaded camming devices and trips to the mountains. But if you want to spend your money on beach vacations, playing golf at expensive resorts, or whatever else it is that makes you happy, by all means go for it.

What I mean is that I see a lot of financial goals that are neither personally meaningful nor even useful for actual financial planning. For instance:

• “I want to reduce my RMDs” is not a good financial goal.
• “I want to avoid Medicare IRMAA in the future” isn’t a good financial goal.
• “I want to make sure my Social Security isn’t taxable” isn’t a good financial goal.
• “I want to make sure my LTCGs will be taxed at a 0% rate in retirement” isn’t a good financial goal.
• “I want to convert [a certain amount or percentage] of my tax-deferred accounts by [age/date]” isn’t a good financial goal.

All of those things should be considered in the analysis. It might make sense to do those things. But they shouldn’t be goals.

Goals should be things like:

• “Increase the likelihood that I’ll be able to spend at least $X per year for the rest of my life.”
• “Increase the amount I’m likely to leave to my kids, after taxes.”
• “Be able to donate $X per year while still being able to satisfy our desired level of spending.”
• “Spend $20,000 extra per year in the first 5 years of retirement to take some trips we’ve always wanted to take — without putting our financial security at risk.”

For instance, with the stated goal, “I want to reduce my RMDs,” well, there are various actions we could take that would definitely reduce your future RMDs. But what if we do some modeling and it turns out that those actions would probably increase the likelihood of portfolio depletion during your lifetime? In such a case, why would we want to do it? As soon as “I want to reduce my future RMDs” comes up against a better financial goal (“I don’t want to run out of money”) the RMD-related goal gets discarded immediately.

As an obvious example, imagine that, in your traditional IRA, you chose to use an expensive stock mutual fund that ultimately underperforms the market by 2% per year. Relative to using a low-cost index fund, using the expensive fund would have the result that your traditional IRA is ultimately smaller, thus your RMDs are smaller, your lifetime tax bill is smaller, your Medicare premiums might be lower, and so on. But that’s not a win. You’re just paying less taxes because you have less money.

In the context of more complicated topics (e.g., which dollars to spend in retirement, whether to do Roth conversions, when to file for Social Security, asset location decisions, etc.), this phenomenon is less obvious, given that there are so many moving parts. But it’s still very important to be focused on the correct metrics. If the software you’re using (or your DIY analysis in a spreadsheet) tells you that a given decision has the effect of, for instance, reducing your RMDs or reducing your lifetime tax bill, that’s not good enough. You need to know more than that, otherwise you could be unwittingly making a decision that falls in the category of “paying less taxes because I have less money.”

When setting goals, I find that sometimes it’s helpful to imagine you have a small child playing devil’s advocate. For instance, for some people it might go something like this:

“I want to reduce my future RMDs.”

“Why?”

“I want to reduce the amount of taxes I’ll have to pay.”

“Why?”

“I’m concerned that taxes will make me more likely to run out of money during retirement.”

And that is what this person is actually concerned about.