How Tax Planning is Like a Chess Game
MARTHA SHEDDEN
Tell us how you came to be a Tax Goddess?
SHAUNA WEKHERLIEN
That's a good question. I started off in astrophysics of all things, but we won't go that far back. To make a very long story short, my brain is definitely a numbers brain. I absolutely love numbers. I love pulling them apart, figuring out the system and the rules and how to play the game. Of course, I have now been doing taxes for a very long time, more than 20 years, and over time the moniker has just kind of stuck. The Tax Goddess seems to suit the personality. Along with being ranked in the top 1% in the country for what I do, those kinds of things are also very helpful.
MARTHA SHEDDEN
As it relates to Social Security and retirement planning, exactly how much of your business is focused on retirement planning and tax strategies? Does it include a comprehensive evaluation of the deaccumulation of assets throughout retirement?
SHAUNA WEKHERLIEN
We look at everything on a very broad spectrum. I think our youngest client is 16 and our oldest is 98. It's a pretty broad range when we start talking about age. Of course, my 16-year- old says, "Retire? When? Later." But when you get to be 30, 40, 50, this is starting to become a very heavy consideration. At some point, “I'd like to actually stop working 12 to 14 hours a day, and build this business to think about retiring,” sounds good. So how do we do that? What do we talk about?
We look at people in that entire range in the accumulation phase. Then the de-accumulation phase is extremely important, because there are multiple different ways to do that. During your accumulation phase, if you put away everything that's going to be taxable, when you get to the de-accumulation stage, you could be in some significant trouble. The tax strategy piece is looking at not only how do we save taxes now, but also how do we manage, mitigate, remove taxes by the time we get to retirement?
MARTHA SHEDDEN
Explain how a retiree's Social Security is affected by their taxes. What mistakes are people making and what can be done to optimize the taxation of Social Security income, as well as other income?
SHAUNA WEKHERLIEN
The first one that comes to mind is not having a business. If you're straight up W2 employee and you work for somebody else, there's not a whole lot you can do to plan from the tax angle. Because what you have is what you have. You pay tax, you gain income. When you get to retirement, you can pull from retirement accounts and you can claim Social Security. But if you make over a certain dollar amount, that Social Security is going to become taxable.
If you have a business, you can plan how much income you have. You can actually choose how much income you report every single year. Having a business allows you to use tax strategies to reduce your taxable income and lower the amount of Social Security that may be taxed. So, one of the biggest mistakes I see is people not planning properly for how to lower their Social Security income tax.
MARTHA SHEDDEN
What type of business? There are different business structures.
SHAUNA WEKHERLIEN
This is the fun one. Basically, any of them. The biggest answer in my world is, it depends. That is the answer to everything in the tax world. With a C corporation, for example, you'd be able to choose literally, “my salary is $30,000.” There are some things that have to be done right to make that work. But a C corporation is an easy choice for something like that, because it would have its own bubble of taxation that is completely separate from you. If you have an S Corp or a partnership or a sole proprietorship, you would implement other strategies. One very important caveat: please, don’t just take advice from a podcast or book, go talk to a qualified professional!
My team and I look at a little over 400 strategies on ways that we can reduce your taxable income. If five of them help lower the taxation of Social Security, we've just solved the problem. The tax code is very much like playing a giant game of chess. Here are the rules. Here's what I'm trying to get to. How do I line it up to get to what I need?
MARTHA SHEDDEN
For financial professionals and individuals reading this, what should they know about a smart tax strategy and how that can affect the longevity and standard of living in retirement?
SHAUNA WEKHERLIEN
First, in my opinion, the most important question people should ask themselves, and a financial advisor should be asking of their clients is, “What is your aggression scale?”
Not a lot of people have heard this. Financial advisors deal with it in relation to stock picking. Should I go into stocks or bonds? That kind of aggression scale. We have something very similar in the tax world. Zero to 10. Zero meaning the IRS will never call me unless it's a random audit, which can happen. And 10, meaning we're all going to jail.
You have to understand where you sit as a client, the person whose money it is, and where your advisor is. At The Tax Goddess, we are an eight, which means we will push the envelope if you want us to, but we're crossing all the T's and dotting all the I's.
As a client, you need to think about where you sit on that scale. If you’re a zero, you need to know that your CPA is a zero, your financial advisor is a zero, your Social Security planner is a zero, everybody on your team needs to be where you want to be. There can be a big difference between where you are currently, and where you want to be. We often hear, “I'm currently at a two, but I want to be an eight.” We can plan for that.
The reason I think that aggression scale question is such an important question when it comes to any kind of planning; tax, financial, Social Security; is because you have to feel comfortable with what you're signing.
Then the second part of your question is about how is that helping when it comes to retirement? Can I pull out money, and what will my lifestyle look like when I actually get to retirement? There are some good zero-level strategies. It's not like all the good ones are a level eight. There are good ones all the way through, but a level eight strategy generally is going to give you a better return-on-investment. Whether that's ROI of time, whether that's ROI of actual money, there are lots of versions of return-on-investment.
When you look at where you are and you work backwards to where you want to be, we tend to ask people, "How much money do you want to spend when you get to retirement, assuming you have no car loans, no mortgage, no debt?” We have to make some assumptions here. "Do you want to spend $5,000 a month? $10,000? More?" I've had clients tell me $30,000 a month. Then we need to be booking a lot in assets right now. If you're super conservative, we need even more assets.
That aggression scale question is very important in my world, because it also applies to tax strategies. If I can save you taxes that will help you build that little nest egg now, you have more to reach what you need when you get to retirement.
MARTHA SHEDDEN
Then you have that longevity of the portfolio. What are the biggest mistakes that individuals are making that affect their retirement planning, besides not having a business? Are there others?
SHAUNA WEKHERLIEN
Absolutely. One that stands out in my mind is not looking at opportunities, and not keeping an open mind. Another is not using insurance for retirement planning.
When most people hear insurance, they instantly shut off their mind. "Nope. I don't need an insurance policy. I don't want to get sold." Unfortunately, insurance has had such a negative vibe around it. But insurance planners have some amazing tools. For example, if you put away $100 a month for your seven-year-old, by the time they hit 65, they're looking at having somewhere between $5 million and $10 million in assets. Some of these insurance programs are absolutely spectacular.
MARTHA SHEDDEN
It's an insurance policy for the child?
SHAUNA WEKHERLIEN
It's an insurance policy. For this particular type of tool, the most common names we hear are either “infinite banking” or “premium financing.” Eventually the child can borrow against it. That's why they call it infinite banking. They've literally created their own bank.
We have many clients who started these things when the kids were seven, and when they reach 18, they get student loans to pay for college and let this money continue to grow. Then, when the student loans are due, they borrow from their own infinite banking program to pay off the student loans, and pay no interest to the student loans. They are paying interest to themselves.
Also, insurance is not taxable. It's effectively tax-free income for retirement. When you die, generally, it's tax-free to any of your heirs. Not only are you getting tax-free money for retirement, but you're also setting up your family. It's really hard for me to argue with that. Going back to your original question, if people don't keep their minds open to opportunities and what's out there, they will miss something like that.
Now, I'm the first person to say there are good ones and there are bad ones. The whole point of this conversation is to keep your mind open. This is an example of something you might consider looking at, and reaching out to professionals to talk to them.
MARTHA SHEDDEN
That automatic negative reaction you referenced also often occurs when you mention annuities or reverse mortgages.
SHAUNA WEKHERLIEN
Reverse mortgages are amazing tools, if they're done right by quality professionals. You're going to get bad people. There are bad tax strategists out there. I've come across many of them, where they’ve told a client to do something that makes me think, "They told you to do what? Oh my goodness."
Keep an open mind. What is the right fit for you, what you want, and your goals? You've got your insurance professional, financial advisor, tax strategist, CPA, bookkeeper, banker, whoever's on your financial team. All six of them may be telling you, "This is a great tool.” Why would you say no to that? That's why you've hired a financial team. Not keeping that open mind is one of the biggest mistakes that I see.
MARTHA SHEDDEN
I couldn't agree with you more. I recommend a lot of our clients consider reverse mortgages, that they be educated on them, because there's so much equity in many people's homes. Why not use that if you can?
SHAUNA WEKHERLIEN
There are some amazing tools out there Unfortunately, sometimes a relative of your neighbor, or a friend of your uncle had a bad experience and that just blew it for everybody. It doesn't mean you're going to have a bad experience. Find good people. That's your homework. Find good people and keep an open mind.
We generally work with higher-wealth individuals. When we speak with them, they tell us, "You're the fifth person we've interviewed. We haven't found someone we like. The aggression scale question, I've never heard anyone else ever ask that.” Everybody else is welcome to steal that question. It's my favorite question. But we have people tell us, "Nobody's ever asked us that.” That's really smart and very important to what we do.”
MARTHA SHEDDEN
What are the top two or three most important takeaways for financial and tax professionals, helping their clients with the Social Security claiming and retirement planning?
SHAUNA WEKHERLIEN
Number one, if it's not your specialty, ask for help. Go find somebody whose specialty it is. I’m one of 660,000 CPAs in the U.S. But there are only 15 people in the country that specialize in what I do for tax strategy. The same thing happens in Social Security. Tip number one is absolutely, “If you don't know, find a specialist.”
Your clients will appreciate it. They understand that not everybody is a specialist in everything. They're not going to run away from you because you're not a specialist in this one area. They've built a relationship with you. Don't panic. Find a specialist is most important in my mind. You have to have a team.
If you can't find a specialist, then research, research, research. Keep your mind open. Find other options. Being in a professional group can be valuable. Even if your group doesn't have a specialist, when you get 40 CPAs or 40 financial advisors in a room, somebody's seen it. Somebody knows. Somebody's had an experience with this, good or bad, to tell you what to watch out for. Being in professional organizations where you actually feel connected and you can have frank conversations about what's going on is super important.
MARTHA SHEDDEN
I've been in a number of women's networking groups, small business owners. It’s so wonderful to have that connection with all those other people.
SHAUNA WEKHERLIEN
Sometimes it's as simple as, "Hey guys, I need to get my car detailed. Who's the best person for that?" It doesn't even have to necessarily be business. When you get into these groups, then you have your own team of other CPAs or other professionals.
MARTHA SHEDDEN
What do you think are retirees’ biggest fears related to taxes and what advice do have to overcome those fears?
SHAUNA WEKHERLIEN
One is that the government's going to take it all. “I'm not going to have enough money. I'm going to have to go back to work. What do I do?” They also worry about a crash. “The stock market's going nuts. Am I going to have enough to pull out on the day I’ll need it?"
My advice is to always have a plan. Here's plan A. I've saved. I've diversified. I have insurance and stocks and bonds and real estate and crypto. I've done all the things.
That's plan A. Everything's going to be fine. But what if it isn’t? If the stock market crashes, can you survive? Have plan B. Have plan C. Have plan D. There's a difference between surviving and thriving on how much money you have in these other options. Generally, everything does not all crash at the same time. The stock market tanks, housing goes a little weird, fine, you still have your insurance.
Having a plan is all about the diversification. If this goes bad, then what? If this goes bad, then what? If we're on plan F, are you moving to Mexico, because Mexico's cheap and living on the beach is awesome? What are those plans? Honestly, I believe if you've gone through in your mind the worst-case scenario that can possibly happen to you and you've figured out an answer, then if that happens, you know what you’re going to do.
Hopefully it never happens. But hope is not a strategy. If you have a plan, if you have a strategy for all the things that could go wrong, if any one of those go wrong, you’ll say, “I already had a plan for that. That's fine. Let's go do this other thing."
I believe a lot of people think, “I'll get to retirement later." They're hiding their head in the sand. At some point, you're going to want to retire. This is not a “Maybe”. At some point, you're going to want to sit on a beach in Mexico with a cute little drink with an umbrella in it. It's going to happen, so figure out a plan.
MARTHA SHEDDEN
You’ve described what many pre-retirees don't know about retirement. They understand that they need to plan until it’s too late. Many people who come to me for help with Social Security are so distraught and so confused. Once they have the plan and they have the action and the steps to take, it's a whole different world.
SHAUNA WEKHERLIEN
There's a path. I'm going to quote my mama, who I think is the smartest woman on the entire planet. She always said, "If you're so distraught, go have a good cry about it and then figure it out. It is what it is. Go figure it out, come up with a plan. There's nothing else you're going to do. Go figure out a plan."
MARTHA SHEDDEN
What about tax professionals? How can they stay on the cutting edge of their business? What do you do, besides just paying attention to all the tax rule changes?
SHAUNA WEKHERLIEN
Considering tax rule changes. I get three emails from the IRS every day and I get at least one email every day from every state. That's about 60 emails worth of tax data. Most professionals don't have time to read 60 emails and follow all the links and do all the reading. You just don't. You can build a team so that you have time to do that. Step one, have an assistant to check your email. Build the team. It’s important to have other people around you who are smarter than you, or more experienced than you
I'm still fairly young in my industry. 21 years is not a long time to be doing what I do. It's long, but not that long. There are CPAs in my industry who have been doing it for 60 years. They've seen it. They've experienced it. They may not know about the cutting edge. You may know more about the tech and the cryptocurrency stuff that's coming out, but they know more about how to get around it with whichever type of tax strategy we're going to use for that.
MARTHA SHEDDEN
For someone who's planning to retire in five years. If they only remember one or two things from this interview with you, what would you like them to remember to better situate themselves for retirement?
SHAUNA WEKHERLIEN
Definitely build your team now. Interview, and get the team that you like in place. Make sure they're doing what you want them to do at your aggression scale, at your levels. Just start researching. Keep an open mind. If you have five years until retirement, start looking at options. I mean big options. I jokingly mentioned Mexico, but many people are leaving the
U.S. We have clients that live in Mexico, Costa Rico, Mexico, Thailand, the Philippines, pick a place. There are a million different options if you keep your eyes open.
MARTHA SHEDDEN
Thank you for sharing so many valuable insights.