Click Here To Listen To The Retirement Tax Services Podcast
Are you trying to learn how to deliver massive tax value to your clients? Then look no further. Retirement Tax Services Podcast, Financial Professional’s Edition is a show hosted by Steven Jarvis, CPA. Steven aims to bridge the gap between tax professionals, financial advisors and their mutual clients in their quest for reducing tax expenses in retirement.
Income Lab co-founder Justin Fitzpatrick joins the show today to share his angle on how taxes fit into retirement. He discusses why he created a new financial planning software, as well as its role in making retirement income planning more realistic and attainable. Steven and Justin also dive into the problems with general and non-personal planning advice and why it’s so important to have a more personal interpretation of things in order to plan effectively.
Listen in to hear about Justin’s background and how Income Lab was built as a focused retired income planning software platform—and not as a replacement for the holistic, generalist platforms. You’ll learn the best ways to fit the software into the planning process and how to get as much value out of it as possible for your clients.
Steven and his guests share more tax-planning insights in today’s Retirement Tax Services Podcast. Feedback, unusual tax-planning stories, and suggestions for future guests can be sent to firstname.lastname@example.org.
Are you interested in content that provides you with action steps that you can take to deliver massive tax value to your clients? Then you are going to love our powerful training sessions online. Click on the link below to get started on your journey:
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We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.
Steven Jarvis: Hello everyone, and welcome to the next episode of The Retirement Tax Services Podcast. This is your host as always, Steven Jarvis, CPA. And with me on the show, my guest is Justin Fitzpatrick, co-founder of Income Lab. And Justin, so excited to have you on the show, welcome.
Justin Fitzpatrick: Steven, thanks a lot for having me. I’m looking forward to it.
Steven Jarvis: Yeah. So, Justin, we’re c have a great conversation today about how taxes fit into retirement planning in general, we’ll talk a little bit about how Income Lab can fit into that.
But before we just dive right in, tell us a little bit about your background in general, and then specifically, of what led you to saying, “You know what, the world needs another financial planning software. So, here’s what we’re going to do that’s different.”
Justin Fitzpatrick: Yeah, so I’m an academic by training. I did a PhD at MIT. Thought I’d be a professor for the rest of my life, and then moved into financial services in 2008.
And the software really came about because I was following my comfort zone and doing research on retirement income planning. I just wanted to understand the state of the art, in terms of the research on retirement income planning, and there’s a lot of great research as you know, both from practitioners and from academia.
A lot of financial economists, big name financial economists love retirement income planning I think because it’s so hard. Bill Sharpe, I heard him say that it’s the nastiest, hardest problem he’s ever worked on.
So, was kind of trying to understand the lay of land there and found that there was a huge gap between kind of the best ideas out there in the research world and what an advisor could actually do and scale and deliver to clients. That’s really a tragedy, because if clients can’t benefit, then those great ideas just kind of languish.
So, we built Income Lab as a focused retirement income planning software platform. So, it’s not a replacement for your kind of holistic generalist platforms, to try to bring some of those concepts and ideas and better experiences and better outcomes to clients.
For me, it was really, if people like my parents could access these kinds of ideas and most of what we do surrounds what we call dynamic retirement income planning — so, being with a client on the journey and helping them make adjustments through time, which is really the realistic way to live your life.
That’s how we live in our working years, it’s how we really should and generally do live in our retirement years as well. So, that’s what we focus on. And of course, a big part of that is taxes as well.
Steven Jarvis: For sure. I like to tell people that tax math doesn’t make any sense. Stop trying to find the logic in tax math. Like it’s all made up in arbitrary. And I’m sure it feels that way for retirement income planning in general.
Because as we look at tools available to us, Google has all the information anyone could ever want. The data is there, I don’t have proprietary tax secrets. The problem with Google is that it doesn’t do anything to say, “Well, what does that mean for Bob and Sue?” Because that’s what all of our fictitious clients are named.
And so, I love when we can find tools that help us go from the sheer volume of information that Google has and try to sort through this nonsensical tax math, at least to get to a closer approximation of how do we make recommendations to a specific client.
Justin Fitzpatrick: Yeah, exactly. I think one of the drums that I beat loudest in retirement income planning is just that rules of thumb don’t work for particular situations.
And that’s actually one of the challenges for applying research to real situations is when you’re doing research … I’m an academic by training. This is perfectly fine in the lab, you simplify, you kind of distill out this one thing, and then you try to discover something about it.
Well, I have met very few people who, for example, only live in retirement based on portfolio withdrawals. Almost everybody has something else that’s funding their lifestyle.
And so, in the messy real world, you’re not going to be able to apply those rules of thumbs that you find. On Google, you’re going to have to actually get a little bit more complex because unfortunately, sometimes, the rule of thumb could actually be exactly the opposite of what you should do.
So, I’ve seen that happen before where doing the work (I know you talk about this) — just really understanding the client’s situation can help so much in providing the best possible advice.
Steven Jarvis: Yeah, that’s a great point you make about rules of thumb because I’m a big fan of understanding and using rules of thumb as a starting point, not as the finish line. Especially as we’re having conversations with clients, it’s great to understand, for example, what their marginal tax bracket is and what that might mean for a Roth conversion.
But to your point, just using that rule of thumb of, “Hey, well, let’s just fill the 22% bracket and we’ll be fine.” Well, there’s so much nuance and potential issues that we’re ignoring if we start with the rule of thumb and finish with the rule of thumb.
We’ve got to have some kind of tool, we’ve got to have some kind of process for, “Okay great, we started with the right general idea and the right general direction, but how do we make sure that we’ve considered all those different aspects?”
Justin Fitzpatrick: I totally agree. Yeah, the rules of thumb and things that are based on research, those always come from a place of truth. There is truth in there, but you can’t skip the next step.
Steven Jarvis: Yeah. So, I definitely encourage advisors as we talk about tax planning to make sure they have something in their tool belt, to make sure that they are kind of validating those rules of thumbs, that they’re giving really quality recommendations, that some of these things aren’t getting missed.
So, whether that’s because they’ve got 20 years of tax experience themself and really can dive in the details, or they use a software platform that’s out there — we use a variety of tools. But I definitely really encourage that people have a tool that they can use.
So, as you look at especially the tax portion of Income Lab, how does that fit into the advisors’ overall process, like what is the role there?
Justin Fitzpatrick: Yeah. So, one thing we do on Income Lab is we make sure that tax planning doesn’t happen in a vacuum. Kind of like I was just saying, it’s very easy to find research where wow, the examples and the numbers just all work out perfectly.
And it turns out, “Well, we knew that Bob and Sue would live exactly 30 years and everything was just amazing.” And that’s because it was designed in the research to be that way. But in actuality, that’s not the case.
So, like I said, we do dynamic retirement income planning, which means we kind of reject this idea that life is about success and failure. Some people fly private jets and some will experience total financial ruin. No, what people do is they adjust along the way.
And so, you build these plans, which are ideally as detailed and realistic as possible. And then all of that feeds your tax planning automatically. We don’t want people to have to duplicate data entry and so on.
And A, it’s a really amazing thing for people’s business processes, but also, it allows you to step away from those rules of thumb. And so, you’ll see how taxability of social security interacts with Roth conversions, which also interact with sequence of return risk. Everything is actually related.
And so, that’s kind of one of the cores of how we do tax planning, as people will build these dynamic plans, where they have plans for adjustment that they can share with clients.
“Okay, if this happens, I’ll call you up and tell you can spend more. If this happens, I’ll call you up and tell you it’s time to tighten the belt.” And then you can look right at the tax consequences of that as well.
Steven Jarvis: So, Justin, how do you help advisors find the balance between effective communication with clients and then just kind of overwhelming them with numbers and charts?
Because what can happen at times is that these tools are really exciting and we can almost go down rabbit holes as a numbers person of, “Well, what if I tweak this and this and this and this,” and then we can put this information in front of a client and sometimes it’s all marshmallow to the client.
So, how do you find that balance of we want evidence-based, we want research-based tools, but we want to be able to distill this in an effective way to a client.
Justin Fitzpatrick: Yeah, it’s a big challenge because when you’re creating software for these kinds of things, you’re actually trying to address two different constituencies. There are the clients, and they’re the advisors.
Some advisors, a lot of advisors will want at least the option to dive deep, and kind of see where everything is coming from. But that’s generally not the kind of things you would want to share with clients. It can really just derail a conversation.
So, we’ve tried to make kind of the main views, the cores of our software expressed in the language that clients understand, which typically is dollars and cents. So, occasionally, you’ll see a percentage if we can’t avoid it, but generally, it’s dollars and cents.
So, for example, your income adjustment plan will say, “Hey, if your portfolio does this, then your income will do this in dollar terms.” In the tax side, so typically, a plan will have a mixture again, of social security, pensions, maybe rental properties, all sorts of things and withdrawals. And then the question is, well, what kinds of things can we do with the withdrawals to affect your tax situation?
And another thing we try to do is automatically do as much as we possibly can with the computer so that the advisor can just explore the landscape. So, we want as little guess and check, we don’t want you writing down numbers on a yellow pad, if you don’t have to.
So, you can just compare two ways to source withdrawals and just see how they compare in dollar terms. And generally, that’s total projected taxes, total projected net income, effective tax rates, and things like that.
And so, often, the vast majority of clients will really just have a couple views where they can sort of just digest high level numbers; hey, maybe it’s like a client where Roth conversions make sense.
If we do Roth conversions to the 22% bracket, compare that to not doing them with kind of a taxable text for tax-free, here’s what we project the difference is. And sometimes that’s substantial, but it can be just in a couple of dollar terms.
Steven Jarvis: Such a great reminder that things really, anytime, every time we want to talk about numbers, it’s got to get down to dollars and cents, not percentages.
I steal it right from my brother, Matt Jarvis, this idea of when you say percentages, clients just hear marshmallow, marshmallow, marshmallow.
But now, I can’t get it out of my head. Anytime, I see percentages, that’s what I’m thinking is marshmallow, because even people who focus on numbers all the time, even as I talk to advisors, people just don’t intuitively process percentages.
So, instead of talking about, “Well, your marginal rate is 22%,” it’s, “For the next a hundred dollars of income that you have, you’re going to pay $22 to the federal government.” And just translating it that way, and something that’s going to resonate with the client.
So, I love that you had that emphasis there on not just, “Hey, how big of a spreadsheet can we make? How fancy of a chart can we put together?” But, “How does this actually get communicated to the client?”
Justin Fitzpatrick: Yeah, and we we’ve been lucky to team up with some great researchers. Derek Tharp is one of them. And a lot of his focus is actually on a little bit more of the client side, kind of how do they understand things? He looks a lot at kind of the relationship between advisors and clients, how much trust do they have in the advisor and so on.
I tend to love big tables of numbers, and he’s really pushed us as much as possible to kind of think about that the audience will include clients and that we need to talk at the level that they’re going to understand.
And honestly, when you give the 22% example, to me (and I love numbers), they sound totally different; 22% versus $22. So, it’s really good for us as researchers and advisors as well to see things in those terms.
Steven Jarvis: Yeah, it feels much more real. I can’t translate 22% into anything else in my life, but $22, “Oh, that was dinner last night.” We can translate it to something else.
Well, huge shout out to Derek Tharp, he’s been on the podcast before. I love talking to him. I’ll toot his horn for him for a second here; love talking to Derek because he’s one of the few people I know who’s really entrenched on both sides of, he’s got the academic background to really do the rigorous research, but he’s growing his financial planning practice.
He’s meeting with clients. He has both perspectives of, “What’s the data show, but then when I sit down in front of a client, how does this resonate with them?” That’s such a critical piece.
Justin Fitzpatrick: Definitely. Yep.
Steven Jarvis: So, Justin, taxes are certainly not a simple area. It’s not just that they’re complex now, it’s that they constantly change. So, it’s a big commitment to have taxes included in any piece of software.
How do you make sure that you are staying up to date? That not just that you’ve captured the current complexities, but as it continues to change, that this stays real quality?
Justin Fitzpatrick: We do a few things. So, A, because we are focused on retirement income planning, the taxes that you can model in our software are the things that are related to retirement income planning. So, thankfully, that means that we can kind of simplify some areas where that’s not crucial.
The second great thing is that we only use tax policy that is black letter on tax forms. So, as legislatures change things, we’re going to wait until the bureaucrats actually make the form.
So, we only have to update everything once a year, but there is a scramble in the spring to get everything updated. So, those two things help us a lot, but it’s a lot to bite off.
And we also, on the state side, cover state taxes. Again, focusing on either age-based exclusions, deductions credits, a lot of states exclude certain types of income that are important to retirees. It’s been amazing actually to see that very high tax states actually are not always terrible for retirees. So, yeah, it’s a big job, but we’ve got a great team.
Steven Jarvis: The team is so critical, but for our advisors listening, who have no interest in doing software development, I still really want to key in on that first point, Justin made about what an advantage it is that they have a very narrow focus of the tax code that they’re actually trying to apply.
Because depending on who you ask, the tax code is some 80,000 pages long. And as an advisor, you actually have that same advantage working with your clients, especially the more narrowly you define your niche.
So, embracing tax planning can feel overwhelming if you’re thinking, “I’ve got to learn 80,000 pages of tax code.” But you don’t, you’ve got to get really focused down on what’s most relevant to my clients. And then those are the pieces that you learn.
And I’ll go ahead and beat this drum again; the best way you’re going to do that is by getting your clients’ tax returns and reviewing them every year, so that you are seeing exactly what it is that’s most relevant to your clients.
Justin Fitzpatrick: Definitely. And that cadence of like, it’s not a one and done thing, that’s so important. I think I mentioned at the beginning of our conversation, but really the value is in the process, it’s in the relationship.
So, typically, now, on the adjustments of income, we’re tracking that for people monthly. For taxes, it’s typically more of an annual process where for us, it would be really toward the beginning of the year again, once we kind of get everything updated. So, maybe Q2, you’re looking at projections, okay, what’s the right thing to do this year.
I know you’ve talked about this before as well. It has to be done in the tax year. It can’t be okay, “Well, now, we know, we’ve got all our 1099s and things.” Well, it’s kind of too late at that point to do anything for the past year.
So, we’re really trying to help people kind of streamline as much as possible that process and have conversations about, “Okay, this year, what’s it look like?” including the projections of when we’re going to start social security and so on, what looks like our best course of action?
Steven Jarvis: The timing and understanding the deadlines for things is really critical. And that’s actually what drives a lot of the collaboration that we do at Retirement Tax Services with advisors and tax professionals.
Because by default, what will happen is the advisor works with the client throughout the year. The client eventually gets all the information to the tax preparer, maybe in March of the next year.
And now, even if there were opportunities that came out of the tax return, we’ve missed our chance to implement any of that. So, that timing piece is definitely very critical.
Justin Fitzpatrick: Yeah, again, we’re focused on retirement income planning so, there are other, I think software programs that are more focused on kind of tactical right now kind of looks. And I think those are super valuable.
For us, it’s more about, “Okay, given that this is our plan of how we’re going to fund our lifestyle, what do things look like going on?”
And people are often really surprised that for example, taxability of social security will wax and wane through a plan. Maybe there is more here or that moving piece, moving social security out and Roth conversions earlier will avoid 85% taxability and things like that.
So, this is a place where you can really kind of help educate clients in the power that they have over things. I like to say that retirees have a superpower and that’s that there’s so many moving parts where they actually can make adjustments in timing and how much they spend and so on.
That’s what I think makes retirement planning so exciting. There’s just a lot of value you can provide because these decisions aren’t set in stone, from when you’re 30 or something, you have a lot of options. That’s also what makes it exciting as an advisor, it’s a fun problem to address.
Steven Jarvis: Yeah. Well, it’s definitely very eye-opening for clients the first time that someone shows them just how much tax they will pay over their lifetime.
The name of our company, Retirement Tax Services, we’ve essentially defined your retirement tax as the six or seven-figure bill the IRS is going to ask you to pay over the course of your retirement.
And some people get kind of wide-eyed at, “Well, it can’t be six or seven figures,” but that’s because a lot of people don’t really pay attention to how much of their hard-earned money the IRS is currently keeping.
They’re focused on, “Did I get a refund or did I make a payment?” But yes, for a lot of retirees, six or seven figures, is very, very likely. And so, having that kind of eye-opening moment of this is what your potential tax bill is, and this is why it’s so critical that we work together to have a plan for this, and don’t just let taxes happen to us.
Justin Fitzpatrick: And the difference between the projections for one approach and another approach is often six figures, at least.
Generally, what we see is, if you’re doing it earlier, maybe it’s in your fifties or sixties, then you will see differences in the six figures, sometimes mid to high six figures in projected taxes. So, these are consequential decisions.
Steven Jarvis: Oh, absolutely. Yeah, I was recently talking to advisors, sharing an experience where basically a client had missed out on multiple years of doing Roth conversions, essentially at 0%, just because they didn’t have an advisor who was looking at their return before and their CPA just wasn’t focused on that.
And so, when you talk about multiple years of being able to take up to the standard deduction, so for married filing jointly couple, we’re talking about $26,000 a year in this very specific situation that you are getting out of your IRA tax-free, as opposed to a 20 plus percent income tax. So, yes, these planning recommendations can be very impactful.
Justin Fitzpatrick: Definitely.
Steven Jarvis: Justin, we always like to make sure that we’re taking our conversations and turning them into action for our advisors because information without action of course, is worthless.
So, we’ll give you a chance to tell people how they can follow up and learn more about Income Lab. But as you think specifically about advisors incorporating retirement income planning and tax planning into their practices, what are action items you would recommend?
Justin Fitzpatrick: I think that making sure that your tax planning process is connected to your retirement income planning process is crucial.
So, again, a plan where maybe social security is delayed or there are other moving parts, ideally those things are kind of one and the same. You can miss a lot by trying to apply rules of thumb instead.
So, getting a process, of course, we offer a way to do that, but having a process where your retirement income plan kind of is your retirement tax plan is a great way to make sure that you’re being as accurate as possible, and also, saving yourself some time and headaches.
Steven Jarvis: Absolutely. That’s such an important recommendation that you make sure you have a process for this. It can’t just be something that, “Oh, if I think of that, we’ll include it.”
And to your point, it shouldn’t happen in a silo. It shouldn’t be, “Well, I’ll do financial planning this month. And a couple months from now, I’ll do tax planning.” It’s so interrelated.
I’m still waiting for someone to give me an example of financial planning that gets done that does not have a tax impact, because no one’s come up with anything yet.
Justin Fitzpatrick: Right. And even a tax decision that doesn’t have another impact. They’re just so interrelated, that’s key.
Steven Jarvis: Yeah. The other action item that for me comes out of this as we’re having this conversation, is that you absolutely have to have a tool that supports this.
I know our listeners are very intelligent people, they’re very experienced advisors, but there are just areas of what you’re doing that back of the napkin math is not going to cut it. Doing the math in your head is not going to cut it. You need to have a tool that’s going to help you.
My team certainly uses tools, we love the tools that we use. There are a variety of tools out there, but you can’t … and I would also say that, except in very rare circumstances, if you are using Excel, it’s probably also time to look at getting another tool.
Microsoft pours billions of dollars into Excel, but not related to the tax code. So, of course, one of those tools is Income Lab that Justin has helped create for the industry. So, Justin, tell listeners a little bit more about how they can learn about what Income Lab is doing.
Justin Fitzpatrick: So, the first place is probably our website; incomelaboratory.com or you can just Google Income Lab. We’re really active in the research area as well. We do webinars every month. So, you don’t have to be an Income Lab user to kind of engage with us on the content area.
You’re welcome to come to the webinars. It’s usually me and Derek. And we focus on talking about research and ideas for practice. Derek keeps it all very practical. So, it’s not just going to be kind of a how-to on the software, it’s generally topics that are applicable across a practice.
So, I’d say engage with us there. And on LinkedIn, that’s the primary social media place that we are active. And also, you can sign up for our newsletter on our website and just connect with us there or get a demo.
Steven Jarvis: Awesome. We’ll also have it linked in the show notes. If you’re driving while you’re listening to this, you can come back to it later.
Justin, thank you so much for coming to the show today. I really appreciate your time.
Justin Fitzpatrick: Steven, it was great. Thanks a lot for having me.
Steven Jarvis: Yeah. And for everyone listening, thanks for being here. And until next time, good luck out there. And remember to tip your server, not the IRS.
We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.
The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.