David hulse tax uncertainties contribution decumulation David hulse tax uncertainties contribution decumulation
Podcast 422

422: Managing Tax Rate Uncertainties & Contribution and Decumulation Strategies with David Hulse, PhD

Today, I’m talking to Dr. David Hulse, recently retired Professor Emeritus at the Von Allmen School of Accountancy and the Martin School of Public Policy at the University of Kentucky. He’s a contributing author for federal taxation textbooks and has written about our tax system in several journals.

He recently published a white paper called Roth Vs. Traditional Account Contributions and Tax Rate Uncertainty in the Journal of Financial Planning. It’s a fantastic and informative paper, and we wanted to bring David onto the podcast to break his complex argument down into something simpler and allow him to answer your questions.

With that in mind, in this episode, we discuss the difference between different contribution and decumulation strategies with someone who’s implementing them in his own life as we speak, the changing pace of life for new retirees, and how many people use a mix of retirement accounts and tools to avoid costly mistakes in this phase of life.

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In this podcast interview, you’ll learn:
  • Important facts that many advisors don’t understand about Roth IRAs compared to traditional ones.
  • How to understand the government’s role as a “silent partner” in a traditional IRA.
  • How to assess whether a traditional or Roth IRA is right for you based on whether or not overall (or your personal) tax rate is going to go up.
  • Strategies you can use to address potential problems around required minimum distributions (RMDs) with traditional IRAs.
  • Why David is using a mix of traditional and Roth IRAs across his retirement accounts.
  • The reasons why there’s no simple “set and forget” strategy when it comes to retirement account planning.
Inspiring Quote
  • "Find out what is it that gives meaning to your existence. And it’s different for different people. And sometimes, you’re not quite sure until you try it." - David Hulse, PhD
Interview Resources
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Read the Transcript

Casey Weade: Welcome to the Retire with Purpose podcast, where it is my mission to deliver clarity and purpose and elevate meaning in your life. And we do that in a couple of different ways here on the podcast. If you’re new to the show, I want you to know what to expect. We have both financial and non-financial conversations. Every single Friday, we bring to you a short-form conversation around a trending topic in the financial planning and retirement planning space. And all of those conversations typically will come from our Weekend Reading for Retirees’ email. That’s an email that you have to get signed up for because it’s so much more than just one email hit in your inbox every single Friday with four trending articles to keep you up to date on the latest trends. But we have summaries, we have takeaways, we have assessments, we have free book giveaways, free webinars for you to attend. This is an amazing resource that you won’t want to miss out on. And one of the things that we have our Weekend Reading subscribers do is submit questions for me to pull into the conversation, like I’m going to do today, and you only have that opportunity as a Weekend Reading subscriber. Well, also, if you’ve never signed up before, we will send you a free digital copy of my Wall Street Journal bestseller, Job Optional.

But what are we here for today? Well, every other Monday, we bring you a long-form interview with a world-class guest, and today is no exception. Today, we’re joined by Dr. David Hulse. He is the emeritus professor or was, retired about 18 months ago, emeritus professor in the Von Allmen School of Accountancy and the Martin School of Public Policy at the University of Kentucky. He has published tax-related articles in many journals and is a contributing author for a federal taxation textbook. He received his undergraduate degree from Shippensburg University, his master’s from Louisiana State University, and his PhD from Pennsylvania State University. So, he’s gotten around a little bit and is clearly well educated.

The reason that we brought David on the show was an article that David wrote, actually, a white paper that was published in the Journal of Financial Planning titled Roth Versus Traditional Account Contributions and Tax Rate Uncertainty, that then you’ll see. If you’re a Weekend Reading subscriber, you saw his ultimately the article based on this white paper was in Think Advisor that we sent out to you, Roth vs. Traditional RIAs: The Tax Trade-Off Isn’t Always What You Think.

Now, Marshal Johnson and I, my Vice President here at Howard Bailey, another Certified Financial Planner, we were going to dive into this article and break it down for you so that you could understand it. Like, we typically like to do. We want to take the complex and distill it down to the simple and make it more digestible. And we said, why not in this case? Why don’t we just bring the expert on the show and let him talk through this and let us ask questions to him and let our audience ask questions to him? So, that’s why we brought David on the show today.

But we’re going to have a conversation that goes well beyond just this article. We’re going to talk about David’s retirement. We’re going to have the opportunity to also discuss a 2021 research paper that was in the Journal of Financial Planning that he was a partner in a comparison of the tax efficiency of decumulation strategies, of which David said, he’s going through this process right now. And that’s the really neat opportunity you have today, is that you’re hearing from a real-life retiree and a real-life expert that’s implementing these strategies into his own plan as we speak.


Casey Weade: With that, I’d love to welcome to the podcast, David. Welcome to the podcast.

Dr. David Hulse: Good to be here.

Casey Weade: David, I’m excited to have you here. And you retired about 18 months ago. Now, retiring 18 months ago, you maybe went through the honeymoon stage. Maybe you’re in the next phase. In what stage of retirement would you say that you’re in right now?

Dr. David Hulse: So, I’m still adjusting. I mean, you still think about your working days and so forth, and it all still doesn’t seem quite real. But every month, you get a little bit more into it and a little bit more used to a different phase of life.

Casey Weade: Yeah. I’m curious, for all those that make this transition to retirement, many are thinking about doing it and then going, what’s going to happen? What’s going to come up that is unexpected? What’s going to be the biggest challenge? What would you say for you has been the biggest challenge over the last year and a half?

Dr. David Hulse: Don’t know that I really had any challenges. So, I had several people tell me this before I retired, they had already retired. One of the things I worried about was, what am I going to do with all this time? And they almost all told me the same thing. They said, “Don’t worry about it. Stuff will come along that just takes up your time.” And I found that to be true. And so, I guess the biggest challenge is trying to understand how that can be. You don’t really worry about it too much, but you just kind of wonder, how did I get everything done before?

Casey Weade: I hear that from so many. They go, well, I wasn’t sure I’d have enough to do, but I have so much going on. I have a full plate. It’s fuller than it was in the past. So, that’s great to hear that you have an amazing retirement. As we jump into the article here, your research paper, Roth Versus Traditional Account Contributions and Tax Rate Uncertainty, I wanted to ask this question. How did you decide to focus on Roth conversion for this project? There’s a lot of different areas of tax planning that you could have put your time, energy, and expertise. Why Roth conversion right now?

Dr. David Hulse: So, it was actually kind of by accident. A few years ago, I was participating in a tax panel that was looking at Roth versus traditional-type accounts. And so, I was going through some of the basic mathematical analysis that you normally see for the two types of accounts. But when I was getting ready for participating in this panel, kind of like, someone might ask about, well, when you’re trying to decide whether to put money into a Roth account or a traditional account, you know the money that comes out of a traditional account is going to get taxed or whatever the tax rate is in the future, but you don’t know what that’s going to be.

So, I thought, okay, well, maybe the– I’m not sure I should call it conventional wisdom, but I will. The conventional wisdom was that, things are going to be more uncertain with a traditional account because you have this uncertainty with a tax rate for a traditional account but not for a Roth account because stuff comes out of the Roth account tax free. So, I thought, okay, well, I’ll just put together a simple little American example to show how there’s more uncertainty with the after-tax payoff from a traditional account compared to a Roth account. But it didn’t work out like I thought it would.

So, I played around with it for a while, trying to figure out what did I do wrong, and I couldn’t find anything. And finally, I came to the realization that sometimes, there’s actually less uncertainty with a traditional account than a Roth account, despite having that tax rate uncertainty affecting only a traditional account, not a Roth account. So, it’s really kind of by accident that I stumbled into it. A good accident, but still an accident.

Casey Weade: Definitely one that is so vital to people today. I’m sure that’s why the panel that you were on was really focusing on this particular topic because it seems to be one that, I mean, it comes up every day in the conversations that we’re having with clients here at Howard Bailey and the conversations that we have just like we’re having here today. And I feel that we understand the complexity of this decision. I get the sense that many others don’t understand the complexity of this decision or don’t appreciate it. And that was one of the things that you said, you said that many advisors don’t appreciate the complexity of the Roth versus traditional account decision. Why is that? What is missing? What aren’t we appreciating on average?

Dr. David Hulse: Well, I think there’s just this misperception about the uncertainty and how it affects traditional accounts relative to Roths. It’s just one of those things where, if you think it through on your own, you can come to the wrong answer sometimes. And this is one of those cases. Like I said, I just happened to stumble upon it by accident. And so, I started working out the mathematical analysis of the two types of accounts. And then I got to better understand why these things work the way they do and don’t work the way that a lot of people, including myself, thought they worked.

Casey Weade: Right. Because they have that conventional wisdom, which is just, well, when you’re in working years, you want to go ahead and defer into a traditional IRA. And then when you get into retirement, then you’ll be in a lower tax bracket. So, there’s this conventional wisdom. And then I think that’s accelerated now where they go, “Oh, well, maybe taxes will go up in the future. Maybe we should start thinking about this differently.” And then you have layers of complexity that you talk about in the white paper from IRMAA to Social Security to QCDs and Roth conversion. There is a lot more to take into consideration. But before we get too far ahead of ourselves, I want to make sure that we just offer some basic clarity around the differences between traditional IRAs and Roth IRAs. Could you start by speaking to that?

Dr. David Hulse: Sure. So, as you noted, there’s a lot of differences. But the 2023 article I had in the Journal of Financial Planning really just focuses on the key differences. So, with a traditional account, like a traditional IRA or a traditional 403(b) or 401(k), the money goes in in a tax favorite way. So, if we’re talking about a traditional IRA, you get that deduction on the tax return. If we’re talking about traditional 401(k) or 403(b), you’re not paying taxes on the income, you’re deferring into the account. So, the tax rate comes up front. At the back end, when you take money out, it’s taxable. But you do get that tax break up front.

With Roth accounts, things are just the opposite. So, you’re not getting any tax break up front. So, if you think about contributing to a Roth IRA, there’s no tax deduction. If you contribute to a Roth 401(k) or 403(b), whatever income you’re putting into that account, you’re still being taxed on it on the front end. But on the back end, provided certain conditions are met, the money comes out tax free.

So, I think, to my mind and probably to many people’s minds, the main tradeoff with a traditional versus Roth type account is do you want the tax break on the front end, like with a traditional, or on the back end, which is what you would get with a Roth. And of course, there’s other differences. You mentioned required minimum distributions, RMDs. And you have them with traditional accounts once you hit, I think it’s now age 73. With Roth accounts, you do not have those. And there’s some other differences as well. But I think the big difference is just the timing of the tax break. Is it up front or is it on the back end?

Casey Weade: Yeah. And I think most understand those basics. but there’s an analogy that you provide in this white paper. You talk about the concept of the government being a silent partner in a traditional account. Can you speak to that? How do you think about the government being a silent partner? And how does that help individuals better understand these two variables of after-tax accumulation and after-tax accumulation uncertainty?

Dr. David Hulse: Sure. So, just imagine you have, say, a traditional account, traditional IRA or 401(k). And that account currently has a $100,000 balance, $100,000 value. Well, if you cash that out, you’re not going to have $100,000 to spend because when you cash out that traditional account, that’s going to get taxed and the government is going to take some of it. So, I didn’t come up with this. Plenty of other people have noted this, that it’s helpful to think of the traditional account is really a partnership where the government is a silent partner and that, effectively, a portion of that traditional account belongs to the government and that they’re going to tax some of it away once you cash out that account, once you cash out that partnership, so to speak.

And so, with respect to the paper that I had last year in the Journal of Financial Planning, if you think about the uncertainty of that account’s future value, partly because of the uncertainty of the tax rate, but partly because of the uncertainty of returns. With a traditional account, your silent partner, the government is sharing some of that risk. You’re not bearing all of it. With a Roth account, that account is all yours. The government’s not going to be taxing it. The government’s not sharing the upside. The government’s not sharing the downside.

Casey Weade: When I think about this, it reminds me of an analogy of a variable rate mortgage, you put your dollars. And if you go out and you put dollars into that traditional IRA, you’re getting a tax deduction today. But you don’t know what that future rate is going to be. Is it 10%? Is it 90%? We don’t know what the future is going to be or what the benefit really is. And if we picked up a mortgage today, like many did a few years ago, put themselves at a variable rate mortgage, now, they’re finding themselves in a position that it didn’t work out real well.

And often, you wouldn’t go out and borrow money from someone else, not knowing what the effect of interest rate was going to be that you were going to pay on that loan over your lifetime, that at any given point in the future, they could charge you any given rate that they want to charge you. However, we do this time and time again with traditional IRAs. I don’t think you’d think of it quite that negatively, but I’m curious how you would relate the mortgage analogy to some of the work that you’ve done.

Dr. David Hulse: I haven’t thought about this. I want to be a little bit careful in how I answer. I think there’s some similarity there and that you’ve got a source of risks. In your situation with a mortgage, it’s interest rate risk. And the risk just exists. And how is that risk get borne by the various parties to the transaction? And with a fixed rate mortgage, that risk is really just all on the lender. But when you have that variable mortgage, you’re sharing that risk to a degree with the borrower and the lender. And so, I think there is some similarity with what you see with the traditional and Roth accounts in terms of how that risk gets borne by the taxpayer versus the government.

Casey Weade: Yeah. And I think this is why so many are– they’re starting to understand that. I mean, Roths haven’t been around nearly as long as traditional IRAs. And now, I think we’re seeing a greater prevalence of that. For instance, now, we see them in virtually every account available today. It was 457s for so long, weren’t accounts that you would be able to put funds in a Roth. It was always traditional. And that’s evolved. So, we’re bringing greater awareness to the differences between these two accounts.

One of the things you brought awareness to is the fact that you found if there’s higher after-tax accumulation, there’s a higher degree of uncertainty. And just explain that to us. I think common sense goes, well, if there’s higher after-tax accumulation, does that mean that there’s a lower degree of uncertainty? It’s counterintuitive to the way that most probably think about these dollars growing over time.

Dr. David Hulse: So, I agree it’s counterintuitive. That’s one of the things I discovered as a result of working on this project. So, they’re actually closely related. If you think about the conventional wisdom, which I think in this case is a pretty good conventional wisdom, but if you expect a tax rate to increase from the time you contribute the money to the account to the time you draw the money out, if you expect a tax rate increase, you should go with a Roth. And if you expect a tax rate decrease, you should go with a traditional account, should being, which I was going to give you the higher after-tax accumulation. But if you think about well, if the tax rate increases, why is it that you get a higher after-tax accumulation with the Roth account? The idea is that, again, if you think of the government as a silent partner, the government, in fact, has bought in on the front end at a lower tax rate and what they cash out at on the back end with the higher tax rate. So, the government kind of takes a larger share of that traditional account, relative to a Roth account.

So, with the Roth account, you get to keep more of the after-tax payoff. But if you’re keeping more of the payoff, we’re also bearing more of the riskiness of that payoff. The government’s not sharing in that with a Roth account. And then you can talk about the situation where the tax rate’s expected decrease and all the logic is just reversed around.

Casey Weade: Yeah. Well, I would say, I mean, doesn’t it all come down to our expectation of the future uncertainty of taxes? And in order to determine what the level of uncertainty is, it really comes down to our expectations of future tax rates. Is that true?

Dr. David Hulse: Well, hypothetically, you could be 100% sure that taxes are going to go up to 50%, 60%, 70%. And there could be no uncertainty about that. You still have the increase. So, it’s really two things going on. There’s sort of the level of the increase and then the uncertainty about how much that increase might be or uncertainty about the level of decrease, maybe because you expect to have lower income in retirement, but there might be uncertainty about just how much of a decrease there’ll be.

Casey Weade: Yeah, I’ve had some other guests on the show over the last couple of years talking about that level of certainty that we have about future tax rates. Some have communicated me, David McKnight being one of those that we’ve never had more certainty regarding the future of tax rates, knowing that the Tax Cuts and Jobs Act is going to expire in 2026.

Dr. David Hulse: Well, just this past week, there’s a little tax bill that’s percolating in Congress right now. Part of it has to do with the Child Tax Credit and I’ve seen some articles on that, the popular press in recent days. But related to that, then there’s also been some discussion about, what’s Congress going to do after the election in 2025 regarding the pending expiration of the Tax Cuts and Jobs Act. I would not be surprised to see some sort of extension, perhaps not 100% extension about everything in the Tax Cuts and Jobs Act, but a lot of it getting extended. We saw something like that about 10, 12 years ago. There is a so-called Bush tax cuts after he took office in 2001. And a lot of those cuts were scheduled to expire in 2012. And there ended up being an extension, permanent extension of a lot of those cuts.

Casey Weade: So, your sense is that there’s still an equal amount of uncertainty today as there would have been 10 years ago.

Dr. David Hulse: Perhaps even more. Because the government’s run up a lot more deficits since 10 years ago. And I heard of many financial planners argue that tax rates have nowhere to go but up because of the deficits that the federal government is running.

Casey Weade: And do you agree with that?

Dr. David Hulse: People have been worried about this for 15 years or so, ever since the financial crisis back in 2008, and I haven’t seen a lot yet that’s really forced the government’s hand to start raising taxes. You keep thinking they’re going to have to, but they don’t. And it doesn’t seem like they haven’t had to, yet. It sure seems to me like sooner or later, something’s going to have to give. But then you also look at the situation and say, but it hasn’t happened yet. Maybe that’ll continue.

Casey Weade: Yeah. Well, it seems like a big part of this analysis that you have in this white paper has to do with determining what you believe the future tax rate is going to be and what the odds are of that tax rate coming to fruition.

Dr. David Hulse: In particular, not just when you say the future tax rate, it’s really your tax rate. Casey, if your tax rate goes to 100%, I’m going to feel bad for you, but that’s you, not me.

Casey Weade: Oh, I thought that you had more sympathy any other than that. Well, but it does come down to that, right? I think that is what we take away from this is, well, we have to determine what the odds are for ourselves of future tax rates coming to fruition for ourselves. So, how do you recommend that someone goes about that process? And maybe we don’t say that in general, maybe speak from your own experience. How are you determining those particular odds of different tax rates for yourself in the future? And how is that helping you make these kinds of decisions?

Dr. David Hulse: So, when you look at the mathematical analysis of these sorts of decisions, you have to have some sort of specification of what the future tax rate will be. So, the way this has historically been done is you just kind of put in one number for the future tax rate. And of course, we all know that that’s going to be wrong to some degree. We don’t know in what direction or how much, but you don’t know for sure what it’s going to be.

In my paper, I kind of say, well, you don’t know for sure what it’s going to be, but you can think about this distribution of what the future tax rates might be, and that statistical distribution has a mean and a variance or standard deviation. But I don’t know about you, but I don’t really have a good sense of what that distribution will be, let alone what its mean and variance are. But when you look at what the analysis ends up resulting in, you don’t really need to know precisely what those parameters are. What the decision often boils down to is do you expect an increase or decrease? How much of an increase and how much of a decrease, you may not have a good idea of, but you may have a reasonably good idea about whether your own personal tax rate is going to increase or decrease. Not with certainty, but what if somebody…

Casey Weade: Would it be possible? And maybe that you consider this, but would it be possible to take this research to another level to create greater certainty about future tax rates by incorporating some level of historical tax rate analysis?

Dr. David Hulse: You could. I feel a little bit uncomfortable about that just because, if you say, look back 50 years and look at the history of tax rates over the last 50 years and how they might have varied for a particular type of individual, the political process that led to those tax rates over the last 50 years looks pretty different than a political process that applies, that exists today. And who knows what the politics are going to look like 10, 20, 30 years from now?

Casey Weade: Yeah. We live in a world of pain, uncertainty, and constant work. Is that right? And that’s what makes this decision just so challenging. But then there’s other factors that compound that. What other factors would you like to see incorporated in this analysis and this work that you’ve done to further the research and further the accuracy of it?

Dr. David Hulse: Well, I think one thing that comes to mind right away is, required minimum distributions, RMDs, because that matters a lot for many people. For some people, RMDs don’t matter much because they need to pull the money out of their traditional accounts anyways just to pay the bills. So, it doesn’t really matter if they’re required to do that or not. They’re going to do it. But for other people, they’ve done well, they’ve saved more money on their retirement accounts that they actually need to support the quality of life that they want to have in retirement. If you have those excess funds sitting in a Roth account, that’s good for them because that can continue to grow in a tax advantaged way.

But with the traditional account, you’re going to be forced to take out some money that you really do not want to take out. So, I think that’s something that if this research would be extended, something that would be good to incorporate. Qualified charitable distributions would be another good thing. Some people, they just don’t have strong charitable giving. And so, for the…

Casey Weade: Let me say something about that. I mean, I have a client that I’ve been working with for a while, and he keeps coming in and saying, “Should I think about converting to Roth?” Should I think about converting to Roth? But he’s so charitably inclined, that every single year he could take his entire RMD and give it to charity every single year. And he’ll never actually run into a tax issue because in all likelihood, he’s never going to pay taxes on that IRA. He’s going to give it to charity. And then when he passes away he’s going to give it to charity. And I think this is why it’s so important to have these conversations with someone that can cut through these rules of thumb and the talking heads.

Dr. David Hulse: Yeah. You know, one way to think about a charitable or qualified charitable contribution, a QCD, is that that’s equivalent to taking the money out of the traditional account and having it be reported as income as it typically would be, but then getting a deduction for it that exactly offsets the income inclusion. And I think if you think about it that way, it can be easier to see to the tax benefit of a QCD. You’re effectively getting a deduction for it. It doesn’t look like it because it’s not an actual deduction. But on the tax form, you report the gross amount of the distribution from the traditional account, and then you might put in zero for the taxable amount. And you’re supposed to write in QCD. And it starts to look a lot like a deduction on the tax return.

Casey Weade: Yeah, we have this one area of complexity. It’s very complex. As you’ve walked through all the different variables and there’s variables beyond that as well that we haven’t touched on. And then that’s kind of the front end decision quite often. But then when you step into retirement there’s another decision. You and I talked about this prior to us actually starting the show today and that was the decumulation element of your retirement plan, your retirement distribution strategy. And you had a 2021 paper in the journal as well, a comparison of the tax efficiency of decumulation strategies. So, can you speak to that? What was the biggest takeaway from that research and what was its basis?

Dr. David Hulse: So there are three of us on that paper, and I think we all had slightly different ideas about what would be the biggest takeaway. But I think to me, the biggest takeaway was that when you think about decumulating your retirement accounts and retirement assets, it’s really important to look at the long run. So one of the things we have in that paper, we have three case scenarios. And for each of those case scenarios we look at, I think four different strategies for decumulating assets. But we have a graph for each of those that charts out what kind of taxable income you would have over the rest of your retirement for each of those strategies in each of those cases. And one of the things I like about those graphs is that it kind of forces you to look at the long run. If you don’t do that, one of the things you might end up doing is focusing too much on the tax savings, the tax effects, and the earlier years of retirement. And you might over focus on those early year tax consequences. And if you do that, you may end up getting hit rather hard with some negative tax consequences somewhere in the future. There’s someone I know that turned 73 recently, and they’re now having to take RMDs, and they’re surprised at how big they are. So I was kind of talking with this person and asking them, “Well, were you doing some partial Roth conversions in the years before that?” And they were saying “No, because I didn’t want to have to pay taxes on those.” And what’s happening now is that the taxes that they’re paying now, because of these RMDs are a lot more than what they would have paid had they done these partial conversions over the last several years.

Casey Weade: Or spent down some of that IRA instead of the taxable dollars. I feel like the biggest takeaway that I get from our conversation and all of the different analysis that you’ve done is that, due to the level of complexity of the decision and even more so, the uncertainty of future tax rates and tax law, that we need to start thinking about our tax buckets here, if you will, our 1099 bucket, our tax deferred bucket and our tax free bucket, much like we might our investment portfolio. We want to maintain a diversified investment strategy because the unknowns and the complexity of the future. Well, the same thing should go for our tax buckets, that we want to create as much tax diversification as we possibly can. If you agree with that, maybe you don’t agree with that, please let me know and either way, however, if you do agree, then how should we think about diversifying those different tax buckets that we have?

Dr. David Hulse: Yeah. So I think it’s good to have different types of accounts, in particular traditional and Roth accounts, having both of those because you don’t know what all life’s going to throw at you during your retirement. When I think about my own retirement, one of the big unknowns out there is long term care costs. You know, somewhere in the future, there could be some really substantial expenditures that my wife and I are going to have to make for our own long term care or not. We just don’t know. And if you think about the uncertainty related to that, that’s really large, especially compared to the uncertainty of a tax rate. So one of the things I’ve thought about is that having sufficient funds in a Roth account allows me to meet those unexpected cash flow needs in the future without having to worry about the taxes. Without having to worry about those distributions from Roth accounts bumping me up into a higher tax bracket and having to take a big tax hit as a result. But at the same time, you don’t want to overdo it because there is a tax cost to converting from a traditional account to a Roth account. And if you overdo it now, you may end up hitting yourself harder than you need to with current taxes. So there’s a bit of a balancing act there.

Casey Weade: Yeah. And when I look at your research, one of the things you said in there was that financial planner can provide more value to decumulation strategies than you analyzed some of the work that Schwab’s doing on an automated basis to automate some of these distribution strategies from a tax perspective as well as conventional wisdom. How is that? How can a financial planner provide more value than an intelligent-driven system like what Schwab’s created and conventional wisdom?

Dr. David Hulse: So, both of those are what we call in that paper, one size fits all strategies. And there’s some good logic behind those strategies, but what you care about is not what works for a generic average investor. What you care about is what works best for you. And you’re probably not exactly in the same situation as an average generic investor. So, I think the conventional wisdom or the Schwab strategies or whichever one you might be talking about, I think they’re a good starting point. But I think you need to go beyond that and figure out how can I tweak these strategies to better maneuver the longer-term tax situation that you yourself might be in or expect yourself to be in?

Casey Weade: Well, before we start the conversation, we talked a little bit about artificial intelligence, AI, and how it’s going to play a role in the future of tax planning, decumulation strategies, Roth conversion strategies. And I really would like you to reiterate what you said there because I think that builds upon what you just mentioned.

Dr. David Hulse: Yeah. So, I mean, I think there’s a lot of people that really just don’t know about where AI is going to go and where that’s going to take us. But I read something I thought was pretty good several months ago that likened AI to a hyper-efficient intern. The intern doesn’t have the years of experience that someone who’s have been in the profession for years has, but they do know some stuff. And they can do what they do very quickly, very efficiently. But I think it’s good to have a professional or they can take the AI results and look at them, see if they make sense or not. AI sometimes make stuff up. They call this hallucination.

So, I think a financial professional can provide value in taking the AI results and adding some common sense to it. But a financial professional can also add value to a client by walking the client through the logic underlying the AI’s recommendations as tweaked by the professionals. Because you just don’t want to blindly– even if you’re talking about a human financial professional, it’s not good to just blindly take the result. You want to understand why they’re coming to that. Just like when you go in to talk to your doctor, maybe you have a serious medical condition, some people will just blindly accept their doctor’s recommendations. But I like to understand what’s behind the doctor’s recommendations. And a lot of times, I’ll go with what the doctor recommends, but I want to feel comfortable with what it is that the doctor recommends. And I think you see something similar with someone’s retirement assets. They’re probably willing to go along with what the financial professional recommends, but they want to feel comfortable with what it is they’re recommending. And AI is not going to do a good job of making you feel comfortable about what it’s recommending.

Casey Weade: Yeah, well, and that’s the job of the financial advisor, right? To take this complex topic, distill it down to ways that people can really understand. And that’s one of the things that when I look at your student reviews, that comes up time and time again. You had some outstanding student reviews. I think it was 4.5 out of 5 was your professor rating.

Dr. David Hulse: That’s a 90%. That just barely makes an A.

Casey Weade: Oh, that’s an A. And when we look at some of those reviews, a lot of them say that you were very skilled at taking complex topics, the complex topic of taxes, and making it easier to understand. And then, some of the feedback, because they sent this article out and read through their staff, this is a very complex article. I’m not sure that many are really reading this white paper going, “I understand exactly what he’s talking about.” So, you must be doing something different in the classroom to make these complex topics easier to understand. How do you do that? And how can advisors be better at accomplishing the same thing?

Dr. David Hulse: So, I think, one of the things that helps is just trying to do it. And part of how I got to being able to explain things well with students is many years of not doing it so well. And you just kind of pay attention to what seems to click with students and what does not seem to click with students. And sometimes, you try things and it just doesn’t work. Then you just don’t do it anymore. But sometimes, you see something works and it’s like, “Oh, that’s good, I should keep doing this.” And I think, when you’re a financial professional trying to work with your clients, you go through some of the same dynamics.

Casey Weade: Yeah. You have to have done it yourself in order to be able to explain it to others. And you’ve done that yourself. I want to transition to some of our fan questions that were submitted over the past week. And one of those comes from Dave. And Dave speaks directly to this. I’m going to cut to the chase here with your question, Dave, and thank you for submitting it. Dave says, “Is there a relatively simple, repeatable model or process out there that we can use ourselves each year to plan for our most efficient withdrawal strategy?”

Dr. David Hulse: I would say no, because your circumstances can change year to year. And so, what may have been advisable one, two, three years ago may not be advisable now just because some things have changed in your life, in your situation. Actually, one of the things that’s on my to-do list in the near future is to have my wife filed to start Social Security benefits, and that’s going to change the way we implement our own personal decumulation strategy because we are going to have this additional income there that we’ve not had in the past.

So, there can be changes in your personal situation. That means you need to adapt your decumulation strategy to fit it. And you noted the scheduled expiration of the changes made by the Tax Cuts and Jobs Act. Maybe that’ll happen, maybe it won’t. Maybe it’ll be somewhere in between. We just don’t know until it happens or doesn’t happen. And depending on how that does change, people may need to modify their decumulation strategies to work and adapt to those changes.

Casey Weade: Because of the number of variables and the human element of it as well, and determining what your thoughts are about the future and just how you think about finances in general, it’s not simple or repeatable, largely because there is a human element, and that makes up a big part of this.

Dr. David Hulse: Right. But if you think about why it is that you’re doing your strategy the way you’re doing it, the underlying factors may not change that much from one year to the next. The way you work with them may change, but the factors themselves may not change. And that’s why I think it’s important to understand the underlying reasons for doing these things. Yeah, the circumstances might change. Maybe your circumstances, maybe the government changes the circumstances for you, but if you understand the underlying reasons for it, then you can probably adapt it more easily to whatever situation you find yourself in.

Casey Weade: That’s great. Let’s go deeper here with our next question from Steve. Steve says, “We know there are percentages, like the rule of 100.” And he asks, “Is there a rule of thumb or a percentage from a tax standpoint for tax brokerage accounts versus tax-deferred accounts versus Roth accounts of various ages?” So, I read that question as how much should I have on a percentage basis in my 1099, my tax deferred, my tax-free account based on where my age is?

Dr. David Hulse: I don’t think so. When I think about the mathematics underlying these various accounts, that don’t really depend so much on age. They really depend on tax rates now and in the future. I think where the age comes into play is deciding what kinds of investments you hold in those accounts. The older you are, the more conservatively you might want to invest. But you can invest conservatively or aggressively in all those various types of accounts.

Casey Weade: Yeah. And again, it just seems that there’s just not a rule of thumb. There’s a lot to consider here. And if I may bring things to a close with a more of philosophical question, we’ve had a pretty technical discussion thus far. Let me switch to the softer side of retirement or the more human elements of retirement. And that is coming back to the definition of the podcast today and what we call ourselves is Retire with Purpose. I’m curious, now you’re in retirement for a year and a half, how would you define what retire with purpose really means?

Dr. David Hulse: So, by now, what has meaning to you? What is that you like to do? Some people like to keep doing what they were doing in their working years, maybe instead with some sort of terrible organization or maybe some small business or something like that. Some people just want to get into something completely different. Maybe they were a financial planner for their working lives, and now they want to paint stuff, like President Bush is doing now. So, find out what is it that gives meaning to your existence. And it’s different for different people. And sometimes, you’re not quite sure until you try it.

Casey Weade: And how would you define that for yourself right now?

Dr. David Hulse: So, one of the things I am continuing to do, when you introduce me that I’m a contributing author for a tax textbook and I still am, I still do that on the side. So, actually, I just got an email a short while ago about some revisions that we’re doing for the upcoming edition of the book and that allows me to kind of keep doing what I have been doing throughout my career, allows me to keep trying to explain things in a way that’s clear to students because they’re the ones that primarily use our textbook. So, at least, for now, that’s what gives me purpose.

Casey Weade: And it’s also meant…

Dr. David Hulse: And then they will change in 5 or 10 years, we’ll see.

Casey Weade: Oh, it’s always evolving, just like the tax rate world. So, yeah, what you’re really doing is you’re taking some of the strengths of your past, the skills of your past, and pulling those forward, which is really what we want everyone to be doing as they step into their own purpose-based retirement. David, I want to wrap things up and just say we’re grateful for your research here at Howard Bailey. And I know so many others are finding immense value in it. Please keep it up. And thank you for joining us.

Dr. David Hulse: You’re welcome. It’s my pleasure.