Gross returns in your portfolio are irrelevant. What matters is returns net of taxes. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to guide you to a successful stress-free retirement while spending more and avoiding being overwhelmed by taxes. Taxes are likely to be the biggest bill for a retiree. To get around this problem, pre-retirees and retirees must build a portfolio that meets their goals with the highest risk-adjusted return net of taxes.

There are four types of taxes that will be paid involving your portfolio. From your taxable or individual account, you will pay annual taxes on dividends and interest. Also from your taxable account are taxes when an appreciated asset is sold. You have your tax-deferred account, where all that money is taxed as income when withdrawn, and your tax-exempt account, money that is taxed on the way in, but never taxed again.

Here’s what you need to know: Your current marginal tax rate, including state taxes, which is to say your tax bracket, what your marginal tax rate may look like in the future, including net investment taxes, where we think we will be at income-wise compared to current marginal brackets, the length of investment time horizon, and investment characteristics like taxation, volatility, turnover, and income.

In short, it’s complicated. I ask my clients when going through this exercise, do you think taxes will be higher or lower in the future? As it currently stands, taxes are scheduled to go up in 2025. If taxes don’t go up, you likely will earn more, save more, and have more portfolio growth into the future, making for a higher tax bill. Retiring doesn’t automatically mean lower taxes. In some cases, it can mean higher taxes due to RMDs, fewer deductions, and Social Security. If we don’t have all of our dollars converted to Roth, one of the best ways to look at smoothing your tax bill for net returns is asset allocation.

Long-term assets we project to grow large gains should be in a tax-exempt account. Stable, slow investments that will soon be sold can go into the tax-deferred account. Next, we can look at our spending order. Let’s make an example. If you have $1 million and 25 years to live, one account earns 8% with 25% tax on growth, another earns 8% with no tax, a Roth style. If you spend the Roth first, you could receive $6,656 per month. If you spend the taxable first, you could receive $7,305 per month. Spending lower net return assets provides you risk-free an additional $7,800 per year. Spend the money the government wants to tax first, instead of letting it grow and paying a larger taxable sum.

The ideal spending plan will smooth income tax brackets over retirement to minimize taxation over your lifetime. This may mean higher taxes in some years to avoid even higher taxes later. With that, create an asset allocation plan and spending plan to smooth your lifetime tax bill.

Subscribe to our YouTube channel. If you have any financial questions, email them to contact@BocaRetirement.com. I’m Hunter Brockway, founder of Boca Retirement Strategies. Enjoy your successful retirement. Thank you for watching. We’ll put together a simplified plan for you to help you take the next steps towards a successful, stress-free retirement with more money and fewer taxes. See you over there. Bye.