You’ve saved for decades, and you’ve run the numbers on what you’ll need. So why do most pre-retirees walk into the biggest financial transition of their lives on assumptions that fall apart in the first few years? Joe Anderson, CFP® and Big Al Clopine, CPA break down 10 assumptions that derail solid retirement plans, from what you’ll really spend and what Medicare really costs to when to claim Social Security and which account to pull from first.
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10 Wrong Retirement Assumptions:
- I’ll work as long as I want.
- I’ve saved a ton. That’s all that matters. I don’t care what I spend.
- I’ll spend a lot less money once I retire.
- A big balance means I’m safe from a bad market.
- Taxes? I’ll just figure it out in retirement.
- Set it and forget it.
- Medicare covers most healthcare costs in retirement.
- I have plenty of time to plan. I’ll wait until tomorrow.
- I should claim Social Security as soon as I can get it.
- I’ll just pull from whatever account has the most money.
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Transcript:
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Joe: Pre-retirees are heading into the largest transition of their financial lives with the wrong assumptions. Do you have the right assumptions? Welcome to the show, everyone. Show’s called Your Money, Your Wealth. Joe Anderson here, president of Pure Financial Advisors, and I’m with the big man sitting right over there, Big Al Clopine.
Al: How you doing, brother?
Joe: Good. How are you, sir?
Al: Couldn’t be better.
Just got back from Hawaii. Loving life.
Joe: Oh, wow. You look like you got a nice little glow on you.
Al: A little bit. Yep.
Joe: We’re talking about assumptions.
Al: Okay. Let’s do it.
Joe: Most people have the wrong assumptions as they transition into retirement. We’re gonna break down the top 10. That’s today’s Financial Focus.
Retirement Spending vs. Retirement Savings: The Math Most Pre-Retirees Skip
All right, let’s go. Assumption number one. Al, going to work as long as I want.
Al: Yeah. It turns out, probably more than half the people don’t do that because they l- leave the workforce for a variety of reasons, mostly unexpected.
Joe: Half. It’s like, “Hey, I’m gonna work until I’m 70.” No you’re not. You’re retired at 60 because it could be healthcare, it could be a caregiving situation.
You could get laid off. So just thinking, “Hey, I’m 60, I still have plenty of years. I’m gonna work until I’m 70. I can- now I’m gonna really pour on the savings.” Guess what? Two years later, boom, you get the hook. Big Al.
Al: All right. today we’re gonna get into the math, the moves, and the mindset. You gotta get all three right.
Joe, there’s so many of these assumptions that are wrong, and I think right off the bat it’s like there’s kind of two phases, right? There’s accumulation and distribution, and it’s, kind of a d- different strategies for both.
Joe: Like Big Al said, here, accumulation, distribution. Two totally different types of planning.
This is what you’re doing now is you’re going through the work phase, saving money into the 401(k), putting money into a Roth IRA. But now this is the second half, right? This is your first half, second half. What is the game one, Al? It’s the second half, so you can’t make any mistakes. You have plenty of time to make mistakes here, but if you make mistakes in the distribution, that’s where we see people run out.
Al: You’re not making money anymore, now you’re spending. And so when we think of assumptions for accumulation, you’re thinking, “Okay, if I earn 6%, 8%,” whatever number you wanna use, it doesn’t matter if it fluctuates. But it matters a lot when it fluctuates on distribution, because you’re pulling money out at the same time the market.
Joe: Sequence of return, what accounts are you gonna pull out of, what is your tax liability gonna be on the income that you need. You’re giving up your paycheck to create your own paycheck. Assumption number two. Hey, I’ve saved a ton. That’s all that matters. I don’t care what I spend Big Al.
How Long Will $1 Million Actually Last in Retirement?
Al: You know, it’s so funny.
Th- this is really true. We get this all the time. You, go to any financial publication and they’re saying, “How much do you need? A million dollars. Is that enough to retire? Two million, enough to retire.” Whatever it may be, right? the truth is, it’s the relationship between the spending and the saving.
So here’s an example. Say you’re spending $100,000. Social Security is 50,000, so your gap, your shortfall, from your investments is 50,000, right? Okay, so that’s what you need. You got a million bucks to start. Now, you have to pull out a little bit more for taxes, so we’ll call it 57,000. That’s a 5.7% distribution rate, and guess what?
Given a certain conservative assumptions, you run out of money around 85, 86.
Joe: Yeah. So the assumptions are we’re running the 6% rate of return with the 3% inflation- Is that, all right, here, I want to spend 100, I have that million dollars. You just kind of see this thing deplete at 86. Let’s look at a couple of other examples, Al, is that, all right, how long will my money last?
How much money can I spend? You know, sometimes people don’t understand the math part, right? A million dollars, that’s a ton of cash. “Hey, I have a million dollars in the bank. I’m ready to retire. Let’s rock and roll.” All right. now, if I spend $120,000, I still have that $50,000 of social security, so I’m not taking $120,000 distribution rate.
But still, this is too much because I’m gonna run out at 79 This is a 3% burn rate, 103. If I take 4% out of the portfolio, gets me to 92. So you wanna be careful of these higher distribution rates. You’re gonna see yourself run out of money maybe a little bit earlier than you anticipated.
Why Retirement Spending Peaks Early and Then Shifts
Al: Yeah, and I think the other thing people get wrong is their spending in retirement.
They think it’s gonna go down, and spending is often highest in the first years of retirement. Why? ‘Cause Joe, as you like to say, every day’s Saturday.
Joe: If I look here at 65 to 67, my- what’s gonna increase? bucket list experiences. I wanna buy a house in Hawaii, live next to Big Al. Hey, I’m gonna put a new pool ’cause I’m home every day.
I wanna hang out at the pool. I don’t know, hobbies, new pursuit, family gifts. I got some time, so hey, let’s spoil the grandkids. But then I hit the 75, 85 range. travel’s slow, so I’m gonna spend less money, but oh, boy, medical costs surge, prescription drugs, home modifications. And then 85 plus, then you got the long-term care expenses and everything else.
So the assumption is, hey, I will spend a lot less money once I retire. That’s true for some, for sure, but you just wanna make sure that, A, look at the spending trends and make sure that you budget for them.
Al: So a lot of people find when they do the math, they’re spending a little bit too much. So how can you spend a little bit less?
no one really wants to do a budget, but sometimes that’s a good way to keep track of your expenses. But some simple things you can do. You like travel? think about shoulder season or look for those deals that come up, right? Buy things on sale events. Amazon Prime t- Prime Day, you know? You get things cheaper.
If you have high interest rate credit cards, pay them off. There’s probably a lot of things you can, when you look at your spending, you could probably trim a little bit here and there if you need to.
Joe: If you need more help with this, you know where to go, YourMoneyYourWealth.com. Our special offer today is our Retirement Readiness Guide, most popular guide that we have.
If you haven’t got it yet, get it now. Retirement Readiness Guide, it gets you ready for retirement. Look at the assumptions that you’re thinking, looking at the assumptions that you’re making. Run the numbers. Figure it out. This is a huge financial transition. You’re probably only gonna do it once. You wanna do it right.
Hey, we gotta take a break. We got more assumptions coming up, so you don’t wanna miss these. We’ll be right back.
Joe: Hey, welcome back to the show. Joe Anderson, Big Al here, breaking down assumptions that pre-retirees are making before they make the biggest transition of their lives. Most of them are wrong. You wanna get this right. Before we jump into more, let’s see how you did on that true false question.
Market Drops, Tax Bills, and the Set-It-and-Forget-It Portfolio
Al: Over half investors age 55 to 60 fear losing money. True or false? Joe, we’ve, we’ve seen this m- in many studies. It’s actually true, probably more than 50%.
Joe: Six in 10. The issue is, that you have to understand what you’re invested in. Markets go up and down. There’s no reason to have fear here if you understand the strategy and discipline.
Sometimes when markets go down, Al, there’s a lot of opportunities that people can do to actually rebalance the overall account, tax manage the account if they’re disciplined in approach. So when you get fearful though, then that’s when you make mistakes, and then that’s when you get out of the market, and then it’s like, when do you get back in?
Al: Emotions take over, right? The market crashes, I can’t afford to lose any more, I get out, and you don’t really receive the recovery. So why don’t we take a look at an example. So this is, the assumption is this: a big balance means I’m safe from a bad market, and that’s not necessarily true, Joe.
It’s all in how you have your money invested.
Why a Big Balance Won’t Protect You From a 20% Market Drop
Joe: So let’s say I have 100% stocks. Like, all right, I’m feeling pretty good, but I have no strategy. I pick investments. Hey, I like Tesla, I like Nvidia. Oh, I really got into SpaceX. And you’re buying stocks or you like dividend-paying stocks or you like this or that or whatever.
So you’re collecting investments and lo and behold, you have no real strategy when it comes to a distribution plan, but you might had a really good accumulation strategy. So you got that million-dollar investment. a 20% crash, that happens all the time, right? It’s not like a blue moon, situation here.
that million dollars is gonna drop to 738, right? No strategy when you’re taking dollars out. Maybe you might wanna think of a tiered strategy as you’re looking at a str- distribution plan.
Al: Yeah, and why this is so dramatic, Joe, is because not only is the market going down, but you’re pulling money out to pay for your expenses.
So if you got a better plan, you got some safe money in cash, you got some safer money in bonds, then the, yeah, market corrects, it usually just affects your equities, and you have money that’s there for you to pay your bills while you let the stock market recover.
The RMD Tax Time Bomb Waiting in Your Retirement Accounts
Joe: All right. Assumption number five. Here’s what people say. “Hey, you know what? Taxes, I’ll just figure it out in retirement. I don’t need a strategy up front.” That could hurt you quite a bit.
Al: yeah, ’cause at 75, your required minimum distributions kick in. You gotta take money out of your IRA, 401(k)even if you don’t want to. It may push you into higher brackets.
You’ll have higher provisional income likely because of Social Security. And guess what? You’ll have to pay more in Medicare premiums as your income goes up.
Joe: Yeah. When you look at tax strategy, you have to look at five, 10, 15 years forward, right? I think a lot of CPAs, no offense to my good friend Alan, their job is to look at the tax compliance.
What did you do last year? What can we do this year to save you money on that current year’s tax return? You wanna make sure that you’re also forward-looking, right? So what’s gonna happen over the next five years, 10 years? Where’s my money held? Is it all in retirement accounts? Do I have money in Roth?
What do my brokerage accounts look like? How much money am I saving, or where am I taking those dollars out? You know, what happens is that if you ignore it, you run into a tax time bomb when you hit RMD age. And a lot of you right now that are watching this know exactly what I’m talking about. It’s like, “I had no idea that the force out of my retirement account was gonna be so large that, hey, it bumped me up into a higher tax, IRMAA, and everything else in between.”
So make sure that you’re not only looking at how much can you save this year from a tax perspective with your tax professional, but also making sure that you’re looking ahead of time as well so you don’t run into any of these surprises. All right, assumption number six, set it and forget it.
Al: And that’s a mistake.
And the reason it’s a mistake is because different parts of your portfolio go up and down at different levels, and if you set and forget for 10 years, 20 years, 30 years, you’re gonna end up with a asset allocation that wasn’t what you wanted. Typically, stocks will outperform bonds. You’ll have a lot more stocks in your account over time, right?
And so you’ll be in a much riskier position, so you need to, bal- rebalance. Tax-loss harvesting, that’s a big tax savings for those, stock accounts or individual securities outside of retirement. You always, Joe, have to consider your time horizon and what your goals are. And your goals may change as you age, and your portfolio may need to change.
Joe: Yeah, I mean, I don’t know. Some of my goals change monthly. But, th- here’s the fine line with this, statement. It’s like set it and forget it. A- and I think there’s some truth here that you wanna do some of this, right? You don’t wanna go in there and start m- monkeying with your investments every day, right?
You find your right asset allocation, right? Making sure that you’re rebalancing the overall account, tax managing it, managing that risk. But it’s not, you know, so I’d like set it and forget it to some degree, right? It’s like, oh, let’s buy this or sell this, or what, or who’s in office, or who’s not in office, or this.
You know, all of that is noise, and then that could get you into trouble. So set it and forget it from that perspective works. But as you transition into retirement, as you’re taking income from the portfolio, I told you, it’s a totally different game from saving. Set and forget it when you save, right?
And then five years from retirement, then maybe wake up, take a look at it, right? Then you n- need to get a little bit more strategy involved as you start taking those distributions. All right, if you need help, go to YourMoneyYourWealth.com. We got that free guide for you. It’s our Retirement Readiness Guide.
What are the things that you gotta consider as you accumulate wealth to your retirement date, and what are the things that you need to know when you start taking income from your overall portfolio, Social Security, your pensions. Do you have real estate? Are you gonna work part-time? All the things are all-encompassing in our Retirement Readiness Guide.
Get ready for retirement, folks. Go to YourMoneyYourWealth.com, click on that special offer. All right, we gotta take another break. We’re gonna wrap up our assumptions, and we saved the best for last. Don’t go anywhere.
Joe: Hey, welcome back. Welcome back to the show. Show’s called Your Money, Your Wealth®. Joe Anderson, Big Al, talking about the assumptions that people make as they approach retirement.
Most of them are not getting it right. Hopefully that’s not you. If you want a little bit more help, go to YourMoneyYourWealth.com, click on our special offer today. It’s our famous Retirement Readiness Guide. Are you getting ready for retirement? Download the guide. It’s free of charge. Just go to Your Money Your Wealth, click on the special offer. You can download it right there on your computer. Let’s see how you did on that true false question.
Medicare, Social Security, and Withdrawal Order: The Retirement Decisions With Deadlines
Al: Medicare covers most healthcare costs in retirement, true or false? I think a lot of us know that’s not really true. Medicare does not cover everything. And Joe, in fact, a lot of retirees are surprised how much medical costs are.
Joe: 40% of retirees say healthcare costs were higher, than they anticipated.
Al: So the reason why it’s higher, Joe, is because Medicare does not cover everything, right? So dental, vision, hearing, hearing aids, not covered. Long-term care, this is a surprise to a lot of people. You need to go to long-term care facility, it’s not covered. You have higher Medicare premiums as your income rises.
And Joe, one thing that a lot of people kind of forget is if you retire before 65, you gotta cover your, yourself. You’re used to your employer paying the premiums, now you gotta pay the premium.
Joe: Yeah, you can go through COBRA or you go to the marketplace. So right? That pre-65 bridge. Healthcare costs, it’s like, “Hey, I wanna retire at 60.”
you have a five-year bridge that could cost another 10, $15,000 additional per year than what you already budgeted. So making sure that you get this type, Medicare costs are very expensive. I had plenty of time to plan, Al. I’ll wait for tomorrow. Yeah. Procrastination is probably the biggest killer of most people’s overall retirement.
Al: and it’s true, Joe, because when you think about it, a lot of things that you need to do happen before retirement. So y- you need to be thinking about these. In fact, if you kind of chart it out, you might think of it early career, great, then you got a window. Some of these things you gotta do in advance, and then you’re actually retired, and some of these things, Joe, you can’t even do anymore.
Joe: Yeah. Early career, start here, right? I wish all of us could go back in time and save a couple of extra bucks, right? So if you can’t go back, you know someone that can, or you know someone that’s younger, right? Tell them to save 20 extra dollars a month. That will go a long way. Here’s the window, age 55 and 65.
We’re not saying start at 55. We’re telling you to start here. But this is where people get maybe a little bit more concerned. They’re like, “All right. Now I’m at that 55. I got a 10, 15-year window until I retire. Now I wanna get serious.” Okay? there’s things that you should be thinking about throughout.
Once you hit that 65, now it’s looking at claiming strategies and healthcare, but this window, there’s a lot of opportunities in re- um, in regards to Roth conversions and then also looking at tax diversification. Where are you gonna take those dollars when you do decide, that retirement date finally hits?
Claiming Social Security at 62 vs. 70: A $189,000 Difference
Al: Yeah, and Joe, speaking of Social Security, it makes a pretty big difference when you claim, and here’s just a little example. Age 62, maybe it’s $1,400. Maybe your full benefit at full retirement age was $2,000. You wait till 70, almost $2,500, right? So your annual benefit goes from 16,000, almost 30,000, Joe. It gets close to doubling.
Joe: Yeah. If you look at how much money that, um, an average couple will receive from the Social Security Administration, we have a couple of different examples here. Let’s just assume a two, $2,000 benefit at full retirement age. So we have couple, David and Linda. They’re gonna both claim at age 62. So as Al just talked about, at 62 you’re gonna receive 70% of that benefit, but you’re gonna claim it at 62.
I want my money as soon as I can get it. Let’s just claim the benefit. Boom, $1,400 comes into the overall bank. 20 years, it’s $672,000. Not bad. Take it at 62, you still get a big chunk of change. Strategy B, they wanna wait a little bit. So David, he’s gonna wait now until age 70, but Linda, she’s like, I’m gonna claim it at 65.”
So her benefit will get 1,700. He’s gonna get that 25. Having a strategy with husband and wife now went to 861 at that same 20-year time period. Some people think about a break-even, Al. “Hey, sh- when should I claim? When do I break even?” Don’t think of it that way. I think, of it as this is gonna be a guaranteed income stream for you.
How much money do you wanna get guaranteed for the rest of your life? Lot of factors to consider when you’re using strategies like this, but just understand how the rules work.
Al: Yeah, and I think, you know, we sometimes think of it as kinda longevity insurance, if you will. And, you may wanna consider this. You may wanna consider the spouse with the higher benefit to take it as late as possible, because whoever passes before the other, the survivor, that survivor gets the highest benefit between the two of you.
Which Account Should You Withdraw From First in Retirement?
Joe: All right. Here’s a big one. I’m just gonna pull from whatever account that has the most money.
Here’s what typical orders that we see, is that I’m now retired. I have a pot of money. I have some in a taxable brokerage account, a non-qualified account is what we call it in the biz. We got a tax-deferred account. That’s your IRAs, 401(k)s, 403(b)s. And then third would be your Roth accounts, so tax-free. So you have a taxable account, capital gains, capital asset.
Your retirement accounts, tax-deferred. It’s ordinary income coming out. Roth accounts, pay tax going in, tax-free. So the typical order is what we see when people take money out, is that we’re gonna go through the brokerage account first because we don’t wanna touch this account because it’s all ordinary income, right?
And we wanna have legacy planning with our Roth. Okay? That’s one way to look at it. I think there’s more an effective way to be thinking about how you are pulling dollars from these three accounts. It’s all about how much that you have to pull and what tax bracket that you’re in. Because, Al, we see sometimes people are in the 0% tax bracket and they’re draining out their brokerage account.
And so they’re leaving these tax brackets wide open when they could have been taking dollars from an ordinary income pool and either converting them to a Roth or at least taking it and paying less tax as, um, as they’re living.
Al: Yeah, said, and I think a lot of accountants will tell you to do this order because accountants are trained to say defer, defer, defer.
A tax paid tomorrow is better than a tax paid today. there’s some truth in that. However, have you considered this? Like, if you do that, if you’re low, very low tax brackets until your, non-qualified account runs out, now all of a sudden you have to pull all your money out of your retirement account, pay much higher taxes, and you know what?
Then you hit age 73 or 75, depending upon what year you were born, required minimum distribution, you get in an even higher bracket.
Joe: Yeah, so I look at it as, I wanna pull a little bit from maybe all three of these accounts. Maybe I pull from here to a top of a certain tax bracket, to 12%. If I’m married, it’s $100,000 of taxable income.
Maybe I wanna spend $150,000 a year, hypothetical. I might pull from here to the top of the 12, which would give me about $100,000 of taxable income. I’m not including the, the standard deduction, I’m just… But the rest could come from here, okay? So now I’m blending my overall taxes a little bit. I’m trying to even that tax bill out over my lifetime.
If I pulled the whole 120 out of here, I’m gonna blow through the 12 and then get into the 22, so my total effective rate is gonna be higher. I wanna even out that effective rate throughout my life, and having tax diversification as I’m pulling those dollars could save you tens if not hundreds of thousands of dollars, depending on how much money that you have.
Al: It’s such an important point, and so I’m gonna kinda repeat it, which is when you’re coming up with your distribution plan, make sure you consider taxes, and not only taxes for the current year, but taxes over many years. When you run tax projections for 20, 30 years in retirement, you’ll actually end up with a different answer than if you look at one year at a time.
Your Retirement To-Do List
Joe: All right, here’s your to-do list, folks. Take action. Map out your spending. Figure out what you’re spending today. What is that spending gonna look like in retirement? Look at the what ifs, medical p- um, healthcare costs, vacations, other homes, or are you gonna reduce your spending? maybe not. Just map out that spending. Portfolio structure, what is that portfolio gonna look like? Looking at tax diversification, your fixed income, healthcare, right? There’s a lot of things, but these are the top. Spending, sh- um, portfolio, your taxes, your fixed income timing, and also taking a look at healthcare to make sure that’s mapped out and set up pr- um, appropriately for when you need it.
Al: Gotta take action, and I think that’s a really good summary. We just, you need to think about it before retirement hits.
Joe: All right, if you want more help, if you didn’t write those down, guess what? Go to Your Money Your Wealth, click on our special offer this week. It’s our Retirement Readiness Guide, the famous Retirement Readiness Guide. Get ready for retirement, folks. YourMoneyYourWealth.com, click on that special offer. It’s our Retirement Readiness Guide. Hope you enjoyed the show today. Don’t make those same assumptions that a lot of people do. Understand where you’re sitting, understand where you wanna go, map it out appropriately, and also make sure that you change course when necessary. We’ll see you next time, folks.
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