When it comes to retirement, sometimes the things you don’t do can be more costly than the things you do. Are you your own worst enemy? One reason people make those mistakes is that they don’t know where to go for advice, much less what they should be doing. Your retirement involves more than just opening a savings account and forgetting all about it. You have to know your goals for retirement, and then perhaps alter your lifestyle to meet those goals. The “Dynamic Duo” of financial planning, Joe Anderson, CFP®, and Alan Clopine, CPA, help you avoid some very costly mistakes that could sabotage your retirement.
Five Money Mistakes:
- No Retirement Plan
- Taking Social Security Early
- Tapping Retirement Funds
- No Withdrawal Strategy
- Not Considering Tax Impact: Is Your Plan Tax Efficient?
Important Points:
- 0:00 – Intro
- 1:51 – Five Money Mistakes
- 3:29 – No Retirement Plan
- 4:56 – Determine Shortfall
- 5:41 – Who Qualifies
- 7:03 – Stress Test Your Portfolio
- 7:56 – True/False: I’ll receive my full Social Security benefits at age 65.
- 8:52 – Cost of Claiming Social Security Early
- 11:09 – Maximum Benefit
- 12:26 – Costs of Tapping Retirement Funds
- 13:59 – Stress Test Your Portfolio
- 14:59 – True/False: When you have a significantly younger spouse you can change your withdrawal strategy for your retirement accounts.
- 16:40 – Withdrawal Strategies
- 18:41 – Tax Impact on Retirement Funds
- 19:44 – Tax Impact on Asset Location
- 21:43 – Ask the Experts: I lost my job, so I need to use some money from my retirement funds to pay my son’s college tuition. I’m 53. Is there a way to use the money and avoid paying taxes and penalties?
- 22:52 – Pure Takeaway
- 23:12 – Stress Test Your Portfolio
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Transcript:
Joe: The easiest way to achieve your financial goals is to not make mistakes. The best way to not make mistakes is learn from other people’s mistakes. You know the 5 biggest mistakes people make in their overall retirement? Welcome to the show, folks. The show is called Your Money, Your Wealth®. I’m Joe Anderson, President of Pure Financial Advisors, and of course, I’m with the big man Big Al Clopine. He’s sitting right over there. We’re gonna break things down for your, folks. People are making a ton of mistakes in regards to their overall financial plans. The biggest one is, a, they really don’t know where to get their advice from. 40% of people that are in the workforce almost, they don’t know where to get advice. 20% of retirees. They’re already in retirement, and they’re still confused on what they should be doing. Don’t be a statistic. Learn from us. That’s today’s financial focus. All right. Take a look at these stats, folks. 35% of individuals have zero retirement savings. 35%. Here’s another staggering one. 56% of people really don’t know how much that they need to retire. 56% of people are flying blind. Let’s open up the windshield and figure out where we need to go and get a plan in place. To figure that out, let’s bring in Big Al Clopine.
Al: So we’ve boiled it down to the 5 biggest money mistakes that you’re making when it comes to retirement, so let’s start out with the first one is you don’t have a retirement plan. I can’t tell you how many people we’ve talked to that have no idea. They have no plan, no conception of what they need to do. A second one is taking social security too early. Most of us probably take it too early. Now some of you should take it early, but many shouldn’t, but they are. Third one would be tapping your retirement fund. I think almost everyone has done that at some point or another. Don’t do it because that’s for your retirement. We’ll get into that a little bit. Withdrawal strategies. Make sure you have an appropriate one and make sure it’s tax-efficient, and these are the things that we see, mistakes made over and over and over again when it comes to retirement, and, Joe, in this particular show we want to sort of go over how to avoid them.
Joe: Right. I mean, I think first things first is that you need to have a retirement plan.
Al: Yeah.
Joe: Because if you have a plan in place, you’re probably not gonna tap into your social security early because you’ll know when to claim your strategy or claim your benefit. Tapping your retirement fund. Yeah, emergencies happen, but is this the best place to go? And then from there, right now, you have this nest egg, now what? How do I take the money out and then I don’t have any regards to tax? So looking at this.
Al: We see this every year, right, which is it’s somewhere usually between 45% and even 60% retire earlier than they think, and this is–why is this? Well, you may get terminated from your job, right? Maybe technology has changed, or maybe your specialty is not needed as much anymore. Maybe you get sick, or maybe you’re caring for a loved one, or maybe you just can’t work anymore. Joe, there’s a lot of reasons why people retire early, and then even a good retirement plan doesn’t necessarily cover this, so you have to kind of build in extra for that.
Joe: Right. Without question because if this doesn’t motivate people to start focusing on an overall strategy or plan is that this this is when people plan to retire, right? 18% of people that are surveyed–this is by the employee benefit research institute–18%–“you know what? I’m gonna retire before age 60,” right? Less than 20%. Then look at this stat here. 26% of people said, “I’m going to wait until 70 years of age or older to retire.” here’s the actual numbers, right? 18% before 60. It’s actually 34%. 26% said after 70. The number’s 6%, right? Very few people are working longer. They’re forced into an early retirement for whatever reason, so even though you’re saying, “hey. I still got 10 more years to save” or 10 more years to figure it out or 5 more years, whatever the case may be, I don’t know, not so fast. You might be forced into that early retirement all of a sudden, and if you don’t have a strategy in place, this is where see some failure.
Al: So let’s go through an example of how you sort of figure this out. So the first thing that you got to look at is what you’re spending, right? So here’s an example, right? Let’s say you’re 60, you want to retire at 70. Hopefully you make it, you’re not one of those stats where you didn’t make it, but you got 10 years to work. We’re assuming a 6% rate of return, so you’re spending about $80,000, but then you got to factor in inflation. 10 years from now, that’ll be, like, $93,000 using a 2% inflation rate. Then you look at your fixed income–social security, pensions. Subtract that from the spending, the future spending, so you need $38,000 roughly. Now just quick rule of thumb, 4% rule. You actually multiply that times 25 to see how much savings you actually need. In this example, $950,000. What do you got right now? $600,000? Now you got to do some math to figure out how much do you need to save per month to be able to successfully make it. Now it’s always a little bit more complicated than that because you got inflation, you got to build in costs for potential long-term care and things like that, but in this quick example, maybe you need to save a couple thousand bucks or so to make sure you make it.
Joe: Yeah. I mean, in this example, al, we’re using 3% inflation, but look at inflation today, right? That’s the big topic. So 3%. You might want to use something a little bit higher, maybe something a little bit lower, but this is just for illustration. This is to help you get a little bit tighter on your overall financial plan. You have to start mapping out, a, how much money are you spending, right? Do you want to increase that in retirement, or do you think it’s gonna decrease? Most people that al and I see, they actually spend a little bit more money in those first 5-10 years of retirement. They’re traveling, they’re doing things to their home. There’s all sorts of different things– and finds ways to spend money. Figure out what you have today and then come up with that plan or strategy to make sure that you’re saving appropriately so you can accomplish your goals. It’s that easy. Just map it out. I know the savings part is hard, but if you have a target, if you know where you’re shooting to, right, you’re much more apt to get close to that goal. If you can’t afford 2,000, maybe it’s 200, maybe it’s 1,000, whatever. At least you know what the targets are so each year you can increase a little bit.
Al: Yeah, yeah. No question, and this goes back to not having a retirement plan. This is–your retirement plans don’t have to be that complicated, right? It’s just a little bit of mathematics. The second part of the retirement plan is to figure out what you’re going to be doing in retirement besides the money, but today, we’re gonna focus on the money mistakes, and first thing first, have a plan.
Joe: Stress test your overall retirement plan. That’s our special gift this week. Go to yourmoneyyourwealth.com, click on that special offer. Let’s stress test this thing. Are you prepared for whatever life throws at us? We’ll help you stress it out and figure out if you’re on track, not on track, and what steps that you need to do to get on track. All right. When we get back, we’re gonna start breaking down some social security, some mistakes that you’re making in that regard, so don’t go anywhere. The show is called Your Money, Your Wealth®.
Joe: Hey. Welcome back to the show. The show is called Your Money, Your Wealth®. We’re talking about the 5 big money mistakes that people are making… So you can avoid them and have a successful retirement. Go to our web site yourmoneyyourwealth.com, click on that special offer. This week, it’s a stress test. We’re gonna stress test your retirement and make sure that you are on track for your retirement goals. Let’s see how you did on the true-false question.
Al: True or false? Uh, well, that’s false. The earliest in current day is 66 you have to work to get your full retirement benefits, but actually, we’re now in a phase-out period to where in a few years you’ll have to be 67, so the answer, Joe, is false.
Joe: Yeah. If you were born before 1954–1943-1954–66 is your full retirement age. If you’re born 1960 or later, it’s 67. What are we at, 66 and 2 months?
Al: 66 and 6 months.
Joe: 6 months.
Al: Yeah, and I have personal knowledge about that. Ha ha ha!
Joe: Time flies when you’re having fun.
Al: Yeah.
Joe: Let’s take a look a little bit deeper in regards to what people are giving up by taking their benefits a little early. Right. So if you claim your benefits at 62 versus waiting to age 70, it’s roughly a 77% haircut, ok, from 62 to age 70. This is a pretty big difference, and I know if you’ve done any type of research on social security, a lot of the experts of course they tell you to wait until age 70, and the reason for that of course you get a lot larger benefit, and you’re locked into a larger fixed income for the rest of your life, right, but most of you say, “Hey. Bird in hand is better than two in a bush, so I’m gonna claim it here.” regardless, you need to understand the consequences of your decisions. If you want to take it early, by all means, take it early, but this is what you’re leaving on the table. If you have shorter life expectancy, of course take it early. If you need the cash, of course take it early. If you think the system’s gonna go bust and rob your money, then take it early. I don’t care, right, but just know that this is a pretty big number that a lot of people are leaving on the table.
Al: Yeah, and it’s almost double, Joe. I mean, not quite double, but if you go from 62 to 70, it’s almost double the amount, and that can make quite a big difference. Something to consider is these actuarial tables–that’s a big word. It’s just the calculation of the benefit amount–this was done in the 1980s when we were not living as long. We’re living longer now, so as long as you’ve got reasonable life expectancy, right, not impaired, then it’s gonna be better to wait in most cases, but, Joe, as you said, if you need the money, sure, then get it.
Joe: Right. I mean, if you need the cashflow…
Al: Yeah. Now realize this. If you take benefits at 62 and your full retirement age is 66 or 67, there’s certain dollar amounts– it’s about $20,000 a year is all you can make before you have to start giving some of those benefits back, so be aware of that.
Joe: Let’s take a look at your maximum benefit. This is 2022’s maximum benefit. If you retire at full retirement age, so if you maxed out the system, it’s about $3,300 per month. If you wait until age 70, that’s 4,200 bucks. It’s a pretty good-sized paycheck here. 62, it’s $2,300, so again, these are pretty good, you know, fixed income bases that you’ll want to make sure that you can maximize as much as you can, of course depending on what your portfolio looks like. If I take it early–if you think of it like this–if I take it early and I have a pot of money that I have to live off of, right, well, you’re gonna take less from the portfolio because you already have some fixed income. If I’m not taking that benefit and I’m retiring at 62, well, I’m gonna have to pull out another $2,400 a month from the portfolio. That’s why a lot of people take it early because they don’t want to take it from their portfolio. They would rather get the fixed income so they can take less from the portfolio, but if I fast forward this thing, later in life, ok, you have a lot larger floor, right, so if you do kind of start taking a little bit more out of the overall portfolio, at least you’re not destitute here, right?
Al: It’s such an important decision is when to take social security, but maybe we’ll switch gears, Joe, and talk about people are tapping their retirement savings, and if you look at why, I mean, the first thing is to pay off bills, pay off debt.
Joe: Right. I mean, I think when people transition into retirement, they want to get their, you know, house in order, their financial house in order, or emergencies happen, but people are still taking a lot of money from their overall retirement accounts prior to retirement, and it’s basically blowing them up. One, biggest one, 44% just to pay up debt or bills. I get it. You get laid off, and you have this pot of money, and you’re like, “yeah. Ok. No big deal. We’re just gonna pull a little bit from it,” but if you do that, just understand, right, it’s kind of a big deal. $15,000. You want to pay off some credit cards, right? Maybe you pay off your car loan, maybe you have some other bills that come up. $15,000. Well, if you’re under 59 1/2, 20% federal tax–let’s just assume that. That’s 3 grand. 7% roughly state tax, another 1,000. Oh, don’t forget the penalty, 10%, and then depending on what state that you live in, there could be another state penalty, right, so then the taxes on that is 5,500 bucks, so it really doesn’t cost you 15,000. It costs you maybe a little bit more than 20,000, right?
Al: Yeah, and further, Joe, this is kind of just a generic example. We’re actually filming this show in California, which has high state taxes, and there’s a state tax penalty just like there’s a federal penalty, and many people are in the 22% bracket, 24% bracket with higher taxes. Here’s what we see in California. You take money, you take $40,000 out of your IRA. It’s gonna cost you $20,000, roughly $20,000 in tax, so you only end up with $20,000. Now your account balance is down $40,000 just by getting this net of $20,000. Do you know what that does do your retirement long term? You lose all that compound growth. It’s not good, so this is something you want to avoid at almost all costs.
Joe: Way to keep the show evergreen.
Al: Ha ha ha!
Joe: All right. Go to our web site, folks. Go to yourmoneyyourwealth.com, click on that special offer. It is our stress test. You want to make sure that you’re all right for retirement? Well, go to yourmoneyyourwealth.com, click on that special offer. This week, we’re gonna stress test your retirement for you absolutely free. Check that out for a gift. Yourmoneyyourwealth.com, click on the special offer. We’ll be right back and wrap up the show.
Joe: Hey. Welcome back to the show. The show is called Your Money, Your Wealth®. Joe Anderson, Big Al. We’re talking about the 5 big mistakes that people make in their overall retirement strategy. Hopefully you’re learning some things so you can avoid those mistakes. Better yet, go to our web site yourmoneyyourwealth.com. If you want to stress test your overall retirement, that’s our gift to you. Yourmoneyyourwealth.com, click on the icon that says, “special offer,” and there you go. We’ll stress test it out, make sure that you’re on track. Let’s see, folks, how you did on the true-false question.
Al: True or false? Well, that’s true because there’s different tables for required minimum distributions, Joe. There’s the main one at age 72, and then there’s one if you have a spouse that is 10 years younger than you, you can actually use a different table that doesn’t require as much of your required minimum distribution.
Joe: Is that what that question meant?
Al: Yep. Ha!
Joe: All right. Sounds good. Speaking of withdrawals, do you have a strategy? Now this is probably one of the biggest things that people kind of mess up is that saving for retirement is completely different than creating retirement income from the portfolio, right? As I’m saving $200, $500, $1,000 a month, the volatile stock market is actually my friend. When markets go down, I put that $1,000 into my 401(k) or $500. I’m buying a lot more shares, right, but when the market goes down and I sell that $500 or $1,000, oops, now I’m selling stocks when they’re down. That’s terrible, right? We don’t necessarily want to do that, so you want to make sure that you have a withdrawal strategy on your overall gameplan. Couple things high level, al, is that, you know, rules of thumb here. You could just maybe take a fixed dollar. You could use the 4% rule and other things of that nature. You know, I think you want to really dial this in a little bit more to your specific needs.
Al: So what this is illustrating is 3 different ways on a withdrawal strategy. One is fixed dollar amount. So you got a million dollars, 4% of that, $40,000. Just take $40,000 each and every year. The problem with that is it doesn’t keep up with cost of living. Second one would be the 4% rule plus inflation, right? So maybe you take in this example 2% inflation rate. So $40,000 is what you take the first year, you add 2% the next year, $40,800, and so on, right? The problem there is if inflation is higher or lower it could kind of blow you up, or if the market goes up and down. The last one of course is the fixed percentage. Now this is just taking maybe 4% of whatever your portfolio is. The problem with that is volatile markets. You’ll be taking out a lot less in certain years. Joe, none of them are perfect, but at least it gives you an idea kind of how to think about withdrawal strategies.
Joe: Yeah. I mean, I think that’s all it is to be honest with you.
Al: it’s a guideline.
Joe: Yeah. Totally. When I think of the 4% rule, it’s looking at a forecast if you will. How much money do I need in my nest egg, right? So let’s say I roughly need $40,000 from the overall portfolio, well, in this example, right, you’re taking a million dollars, 4% of a million is that $40,000. So then that’s my shooting point, right? That’s my goal. It’s like I got to get to a million to hopefully get around $40,000 of income, but once it starts taking withdrawals from the portfolio, I don’t know, I’m not a big fan of any of these because things happen in life, right? Inflation spikes, the markets go down like we’re experiencing now, right? People are kind of scrambling. If I’m taking a fixed dollar amount, I’d be really careful with that in certain environments, so that’s why having a little bit more detailed strategy is really gonna pay off long term. What area are you pulling from? Are you selling stocks? Are you selling bonds? Do you have a cash reserve that you’re living off of, right? Home equity line? Whatever. You want to make sure that you map all of this stuff out. Next big thing is the tax consequence.
Al: When it comes to the tax consequence, like, look at your stocks for example, and so let’s just say we have a 10% rate of return, but then maybe it’s capital gain, maybe it’s long-term capital gain. Maybe you’ve owned that stock outside of your retirement account for more than a year, so you get a special capital gains rate, so maybe your taxes are a couple percent, right? So you’re netting 8%. Look at your bonds. Now your bonds have a lower rate of return. Safer money, but lower rate of return. In this particular example, 5.6%, but they’re less tax-efficient, right, because they’re ordinary income. Ordinary income is taxed at a higher rate, so you can see with your bonds not only is it a lower rate, but your taxes are higher, so you’re netting even less, in this example 3.5%.
Joe: Yeah, and a great way to combat that is having a strategy in regards to taxes, right? Is that because if your dollars are sitting here, they’re gonna be taxed at the highest of rates, ordinary income. If I have my money up here, this is tax-free. This is my tax-deferred accounts, and these are my brokerage accounts, if you will, right? So tax-free–Roth IRAs, municipal bonds. Tax-deferred is my IRAs, 401(k)s, 403(b)s. Taxable accounts is my mutual funds, stocks, bonds, real estate, things like that, anything held outside of my retirement accounts. So with– if I look–if all of my money is sitting in this account, right, the effect of my after-tax return is gonna be a lot lower because this is taxed at the highest of rates, 10%-37%. Ideally, I’d like to have money up here because what’s my tax rate? 0%. So if the market gives me 10%, I pull it out, what do I get? I get the full 10%, right? If I get 10% here and I pull it out, I don’t get the full 10%. It could be almost 40% less than that depending on what my tax rate is. If I got money here, ok, and I get 10% on my money, right, I’m not gonna get the full 10%. I could depending on what my tax bracket is, but I could get a haircut at anywhere from, you know, 15% to 23%, 24%, so understanding where your money’s held, understanding what tax bracket that you’re in, ok, and then devising a strategy of how you’re pulling the money out from each of these different pools is gonna make a dramatic, dramatic impact. If I can save money and tax, that’s less money I’m giving to the irs and more for me. That will stretch that dollar out as far as I can with a really good complete tax strategy.
Al: Yeah, and something else, Joe, is when you go to many advisors or you read articles, they’ll tell you to take the money out of your taxable accounts first and your roth and save your tax-deferred for later, defer those taxes as long as you can, and in reality, that’s actually pretty poor advice. You’re much better off looking at your tax bracket year in, year out, figure out how much to pull from your tax-deferred, which will cause higher income but keep you in a lower bracket, how much from capital gain, and how much from Roth. You can actually stretch your dollars a lot more.
Joe: Absolutely. Let’s go to ask the experts.
Al: This is Julie. Well, Julie, first of all, as we said at the beginning of the show, we don’t recommend that you use retirement funds for college expenses because the retirement funds are for you. Better to do college loans or maybe have your son work to help pay, whatever, but to answer your question, yes, you can pull money out of your iras. You can avoid the 10% penalty as long as it’s for qualified higher education costs like room and board, tuition, books, all that sort of thing, and it’s unlimited, but you cannot avoid the taxes. You got to pay the taxes, so whatever your tax rate is, you got to pay those taxes.
Joe: unless it’s here. If it’s in a Roth IRA and you’re still under 59 1/2, you have FIFO tax treatment, first in, first out, so you could take your contributions out of a Roth IRA, you could use it for higher education. I would highly suggest not to do that, but if you do have money in a Roth, you could take out the contributions that you made. There would be no tax there. You always have access to that. What did we learn? Get a retirement plan, get a strategy in place, think about your social security claiming strategy. Tapping into your retirement funds early might not be the best use. Get a withdrawal strategy, and then finally, don’t forget about taxes. That’s it for us today. Hopefully you learned a couple of things. For Big Al Clopine, I’m Joe Anderson. Go to yourmoneyyourwealth.com, get that stress test for your overall retirement plan. Yourmoneyyourwealth.com, click on the stress test. That’s our gift to you, and we’ll see you next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
