Are you on track for retirement, or going off the rails? Chances are you have put some money away for retirement and some thoughts of what you’ll do once you say goodbye to your day job. But do you know if you are really ready to retire? How much is truly enough? Joe Anderson, CFP® and Alan Clopine, CPA, put your retirement numbers and strategies to the test with a pre-retirement review.
Ready for Retirement?
- Are You on Track?
- Boosting Savings
- Consider Income Taxes
- Creating a Plan
Important Points:
- 00:00 – Intro
- 02:32 – Are you on track for retirement?
- 03:23 – Determine retirement spending, income, and shortfall
- 06:51 – Retirement Readiness Guide – free download
- 07:49 – True/False: Social Security is intended to cover most of your retirement income needs
- 08:59 – Savings Boosters: Get the most from your Social Security benefits
- 12:26 – How to save more for retirement
- 14:48 – Retirement account contribution limits
- 15:13 – Retirement Readiness Guide – free download
- 16:23 – True/False: You can ignore taxes in your retirement planning because your taxes will be lower than in your working years.
- 17:49 – Three ways taxes can increase in retirement
- 18:20 – Tax-deferred, taxable, and tax-free accounts: where is your money held in regards to taxation?
- 20:55 – Creating a plan: how to define your retirement goals
- 22:00 – Action items to achieve your goals
- 22:37 – Pure Takeaway
- 23:05 – Retirement Readiness Guide – free download
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Transcript:
Joe: Hey folks, it’s time to get back to the basics. Are you ready for retirement? You’d be shocked to see the reality of people’s retirement readiness. Welcome to the show, everyone. Show’s called Your Money, Your Wealth®. Joe Anderson here, President of Pure Financial Advisors. And of course, I’m with the big man. Here’s Big Al Clopine. He’s a CPA. Hello, Big Al.
Al: Hey, how you doing?
Joe: I am fantastic. We’re going to go back to the basics in regards to retirement readiness. When you look at people, are they prepared? Most people think, yeah, I’m prepared. I’m ready for it. But in actuality, the numbers say something different. One in 3 think they’re significantly behind on their retirement savings. Let’s fix that. That’s today’s financial focus. This is how the math works in regards to creating retirement income in retirement. Here’s the median before tax income. Roughly $82,000. And then if you look at the retirement savings of people from 55 to 64, it’s $185,000. Al, so median, that’s kind of right in the middle, right?
Al: That’s right. That means half are below and half are above that figure.
Joe: So when you look at averages, the averages kind of skew, so if you get people that make several million dollars, you’re going to see these averages go up, but this is right in the middle, so $82,000 is what people make, $185,000, so you have multi-millionaires and billionaires, and then you have people that don’t have a dime. But if you look at the math, Al, how much can $185,000 really produce in income if I’m used to having a lifestyle of $80,000?
Al: It’s a great question, Joe. So yeah, roughly $8000 or 4%, right? And when you get to, at age 60, you should have, according to Fidelity, about 8 times your salary, which would put you about $650,000, $700,000. They’re not there.
Joe: So $185,000- this needs to get to $600,000. Let’s show you how to get there.
Al: Are you ready for retirement? Here’s what we’re gonna discuss today. First of all, are you on track? That’s kind of number one. Where do you, where do you fit? And then for many of us. It’s like, uh, we’re a little behind, so let’s boost our savings and figure this out, because the more time you have to fix this, the better. Let’s not forget income tax and then set up a plan. Gotta have a plan, Joe, when you start this out.
Are You On Track?
Joe: Yeah, I think it’s figuring out, hey, are we on track or not? What do you need to do, right? And come up with the appropriate strategies. What percentage, so start here, here’s a little pop quiz. What percentage of your salary are you currently saving? 10%? 5%? 3%? 2%? Here’s a shocking fact. Let’s say you’re 40 years old and you haven’t saved, that individual would have to save 26% of their gross income to replace 80% of that income when they reach age 67. How many people do you think are saving 26%, Al?
Al: Yeah, that would be a pretty high figure, Joe, and what I like to tell people is to try to work up to 15% or 20%. But it goes to show, depending upon what kind of retirement you have, you should be starting before age 40. But a lot of people don’t, they don’t have a lot. I will tell you, if you start later, there’s still plenty of strategies. But ideally, you would start saving in your 20s or certainly 30s.
Joe: So let’s put paper to pen here. If I’m looking at a strategy, this is something that you all can do, first is figure out what is your desired retirement spending. Or what are you currently spending today? In this example, let’s just call it $75,000. Hey, if I maintain a $75,000 lifestyle, I think I’ll be alright. And then you have to do a little bit of research. What do you believe your Social Security benefits are going to be when you retire? Do you have any pension or any other type of income? Maybe you have a real estate portfolio, or any other type of passive income that is going to come to the household. So $75,000 is what I want to spend. This is my fixed income sources is $50,000. So I take $75,000 minus $50,000. Well, I’m short $25,000. That’s the first number we got to find out.
Al: It is. Always got to figure out the shortfall. Then you take that shortfall, you multiply it by 25. Or divide it by 4%. For you, mathematicians, you get the same number. In this example, $625,000 is what’s recommended that you would have when you retire.
Joe: So then that’s the goal. Hey, I have to get to that $625,000 mark when I retire. All right, so let’s say you’re 55 years old. You want to retire at 66. And now let’s just assume you have $250,000. Well, if you save $10,000 a year, you get 6%. You’re going to get $625,000. This is just a high level example. But this is what you need to do if you start planning. You can just put pen to paper and say, this is what I want to spend. This is what I think I’ll get as fixed income. What is that shortfall? What is my savings goal? And then just do a little bit of math to figure out, hey, how much money should I save? Let’s say you want to retire at 62. Well, you’re going to have to save a lot more than $10,000, then the number’s close to $30,000. Well, it’s like, well, I can’t afford $30,000. So $10,000’s probably a better number? Well, 66 is your game plan. Or, spend less money, right? There’s different levers you could pull here.
Al: Yeah, Joe, I think everyone needs to go through this calculation to figure out kind of where you’re at, especially as you get closer to retirement. But even when you’re younger, it’s a good idea to at least have an idea. And when you do these calculations, sometimes you find, yeah, I’m pretty good. Other times you find I’m- I’m pretty far off, right? And so now you make you want to make some changes. And those changes would be save more, spend less. That’s a sort of a combo, right? If you spend less, then you’re probably gonna be saving more. So that’s one thing. You can work longer, you can work part-time in retirement. You can downsize your home, you can move to a cheaper area. There’s all kinds of things you can do, but you gotta start with a little mathematics to figure out where you’re at.
Joe: Yeah. Just to see if you’re on track, because I think a lot of times is that all right, well, here, I’m 55 or 64. The median savings is less than $200,000. That’s going to produce less than $10,000 of annual income. Well, we have to move some levers here. So it’s increasing the savings, work a little bit longer. So it’s just getting this down on paper. Then you can formulate that strategy. At least you know what needs to happen. If you can’t make it, then that’s fine. You’re not going in this thing blind. You at least have a game plan to say, all right, well, here’s the steps that we need to make. Or you know what? That’s okay. We’re just gonna work a little bit longer or we’re gonna have to reduce our lifestyle or move to a very- maybe a cheaper state or another place than Southern California to retire. To help you with this, you know where to go, go to YourMoneyYourWealth.com, click on that Retirement Readiness Guide. It’s a full guide that will help you step by step to make sure that you are ready for retirement. What are the steps that you need to do? What are the calculations? It will walk you through step by step, absolutely free of charge. It’s our gift to you. We’ve got to take a short break. We’ll be right back.
Andi: Do you know right now how likely you are to run out of money in retirement? There’s an easy way to find out. It’s also free. Go to easiretirement.com.
Joe: All right, we’re getting you ready for retirement on today’s episode. Go to our website, YourMoneyYourWealth.com. Click on that Retirement Readiness Guide. That will give you the tools, the tips to make sure that you are a ready for retirement and the right retirement for you. YourMoneyYourWealth.com. Click on that special offer. Hey, let’s see how you did on that True/False question.
Al: Social security is intended to cover most of your retirement needs. True or false? Interestingly enough, Joe, when you’re in the lowest of salary ranges, it- that’s actually true. It will cover a lot, but the more you make, the lower that percentage that it will cover.
Joe: Yeah. Here’s some numbers for you. So if you look at, alright, if I have some low annual earnings, so if I made $15,000 a year. Well, my Social Security’s going to replace roughly 80% of that. If I make $63,000 a year, it’s gonna cover 43% of that. And if I make over $150,000 a year, it’s only gonna cover 30% of that. And you can kind of see these ratios. The replacement ratios just get outta whack depending on how much more that you make. So it’s not geared to replace your income. It’s there to supplement- to keep you out of poverty base.
Al: Yeah, I think that’s well said, because it’s really- I mean, everyone gets benefit from it, but it’s really designed to kind of skew towards the lower income people. So they’re not completely in poverty and homeless and out on the streets, and so that’s the point of it.
Boosting Your Savings
Joe: Let’s take a look at Social Security. There’s some different claiming strategies that you wanna to take a look at. Real high level- some boosters again, some easy things that you can do as you approach retirement. Social Security is a big lever that you can pull. So right now, if you retire, your full retirement age is 67, you’re going to receive 100% of that PIA, that primary insurance amount that you see on your statement. If you want to claim early, you can claim at 66, 62, the earliest is 62. But just understand that you will receive a 30% permanent haircut if you take your benefit as soon as you can receive it. Or some people are looking, hey, I might want to increase that benefit. So if I can push this thing out, I’d receive an 8% delayed retirement credit each year that I hold up, or I can receive 124% of that benefit.
Al: Yeah, it’s really interesting, Joe, because when you think about some of the calculations we just talked about last segment, sometimes if you work a couple more years then this looks a lot better. And what happens is Social Security is higher and you didn’t use your retirement savings for those two years. And it’s pretty interesting. Sometimes the difference between let’s say retiring 64 or 66 or 67. It could be pretty dramatic.
Joe: Yeah, you gotta be careful in this zone here though. So if I’m going to claim my benefit early, so I’m going to take it before my full retirement age, and we’re just assuming it’s 67, you can’t necessarily double dip. So if I’m continuing to work and I have full-time employment, depending on how much that you make, the Social Security Administration is going to take some of this back. It’s not like they steal it from you. They’re just going to recalculate your overall benefit like you never took it. So, basically, every dollar that you earn over a certain threshold, right, they’re going to take, you know, $2 earned, they’re going to take $1 back from your Social Security benefit if you claim it early. However, if you claim it at your full retirement age, you can claim your benefit, still work full time, make $100,000, $150,000 a year, they’re not going to reduce that overall benefit. So just some things to consider. Sometimes people want to claim it as soon as they can get it, which is fine. But just understand if you’re fully employed, you’re probably not going to receive a big benefit there.
Al: Yeah, I agree with that. And the amount’s around $20,000, $21,000. In other words, if you make more than that, you’re not going to keep all your Social Security. In fact, you may not get to keep any of it. You may have to pay it back. So as Joe said, it doesn’t affect your future benefits. It’s treated as if you never received it and because you never received it, you’ll have higher benefits later.
Joe: Yeah, there’s other things to consider here, too. You have a spousal benefit, there’s survivor benefits. So maybe someone, one spouse, if you’re married. There’s all sorts of different claiming strategies to make sure that you’re fully maxing this thing out. It could end up to be another few hundred thousand dollars of total benefit to the bottom line if you calculate this correctly. All right, let’s take a look at some other boosters here. This is a one of my favorites, it’s always this, pay yourself first. You’re the first person that you pay. Make sure that you’re paying yourself first. What does that mean, Big Al?
Al: That means is that you save first because what most people tend to want to do is okay, I made this amount this month, I’m paying these bills. I’ll go out to this restaurant. I’ll do whatever. I’ll do a little weekend trip. And then you get to month-end, there’s nothing left, right? And so what we’re suggesting is you save first. You pay yourself first, and then with what’s left over, that’s what you have money to spend on.
Joe: Here’s another one that’s being left on the table, 401(k) to the match. Understand your match through your 401(k) provider, through your employer. Sometimes there’s weird formulas. They’re going to match 4% for you know, but you have to put 2% or 6% for 3% or maybe it’s a straight match dollar for dollar up to 3%. So understand the match to make sure that you’re not leaving any dollars on the table, that you’re contributing enough in the plan to make sure that you’re getting that full match. Another thing too, to look at is that sometimes people will fully fund their 401(k) plan. Let’s say they fully funded to the max of the defined contribution limits prior to the end of the year. So they could leave some match on the table that way too.
Al: Yeah, it’s interesting how that happens and it depends upon the plan. But in some cases when you- when you fully fund your plan before year-end, you’re missing out on some of that match. So just be careful there. Now, when we say 401(k) up to the match, that’s a minimum. Actually, we would prefer that you fully fund it. So save as much as you can, it will only help your retirement.
Joe: Looking at saving 50% of your bonuses. Other 50%? I don’t know. Go on a trip, blow it. I don’t care. Right. But your bonuses that you get, it would be a good idea to save 50%. We’re not asking for 100%, right? Yeah, just 50%.
Al: You can have some fun. It’s okay.
Joe: Yeah, I’ve seen like 1/3, 1/3, 1/3, right? Like 1/3 you save, 1/3 goes to taxes, and 1/3 have fun. So, but this is net, so 50% of your net can go into a Roth IRA or your Roth 401(k) or pre-tax. You get a little bit bang for your buck there. And then the rest, do whatever you want with it.
Al: Yeah, and then also Joe, increase your savings with each raise. Because, why not? I mean, you were used to living on a lower amount anyway. So, we’re not saying live on the same amount, you can increase your lifestyle, but just make sure some of that extra raise that you get goes into savings.
Joe: Because what happens is that people have like this style, or lifestyle drift. If you get raises or you get bonuses, right, all of a sudden your lifestyle increases with those bonuses. If you’re comfortable with your lifestyle right now, save that extra into your plans. So that you’re more financially free to leave your employer or retire or, you know, to make other choices there.
Al: So, Joe, let’s talk about how much you actually can save for 2024. Starting out with Roth IRAs or traditional IRAs, it’s $7000. If you’re 50 and older, you can add another $1000 for $8000. 401(k)s, this year it’s $23,000. The catch-up is $7500, so that would be $30,500, 50 and older. And then as far as saving outside of retirement, as much as you want. There’s no limits there.
Joe: Hey if you want more help with this, go to our website, YourMoneyYourWealth.com, click on that special offer this week. It’s our Retirement Readiness Guide. Get ready for retirement. It has the tips, the tricks, and all the calculations that you need to do to make sure that you have a successful retirement. Free of charge, you can download it right there on your computer, YourMoneyYourWealth.com. Click on that special offer. We gotta take another quick break. We’ll be back in just a second.
Andi: Do you know right now how likely you are to run out of money in retirement? There’s an easy way to find out. It’s also free. Go to easiretirement.com.
Consider Income Taxes
Joe: Hey, welcome back folks. Show’s called Your Money, Your Wealth®. Big Al sitting over there. I’m Joe Anderson. I’m a CERTIFIED FINANCIAL PLANNER™. Big Al’s the CPA. We’re trying to break things down for you and get you ready for retirement. Go to YourMoneyYourWealth.com. Click on that special offer this week. It’s our Retirement Readiness Guide. Are you ready for retirement? Figure it out. YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. Let’s see how ready you are for the True/False question. How’d you do?
Al: You can ignore taxes in your retirement planning because your taxes will be lower than in your working years. True or false?
Joe: I think that’s true for many.
Al: Probably for most, but not everybody.
Joe: It really depends. Right? On how well that you’ve saved. The reason why most people are in a low tax bracket, and I think the industry has pounded that in our brains for years, is that you’ll be in a lower tax bracket in retirement. The 401(k) providers, right? It’s pre-tax, you’re in a high tax bracket today, you get the tax deduction today, it grows tax-deferred, and when you pull it out, you’ll be in a lower tax bracket, and everything is great. It’s a win win win. Well, that is true for most people because most people as we look throughout this show haven’t saved a ton of money. So if I only have let’s say $50,000 saved and I’m only pulling a few hundred dollars out a month or a few thousand dollars out a year, I’m probably not going to be in a higher tax bracket than my working years. But if I’ve accumulated hundreds of thousands and millions of dollars, which we’ve seen in retirement accounts, and I’m trying to maintain that same lifestyle that I’ve been accustomed to, but all of my money is coming out of that retirement account that’s taxed at ordinary income rates, the potential of me being in the same rate or higher could be very high.
Al: Yeah. And the reason why it could be higher, first of all, is you may lose some tax deductions. Maybe you pay off your mortgage. You don’t have that mortgage deduction anymore. Then tax withdrawals or RMDs, required minimum distributions, from IRAs and 401(k)s. That’s a requirement. You have to take money out of there. In some cases, when people have pensions and then they have a lot of money saved in a 401(k) and they have to start taking money out, their income is actually higher in retirement. Right. And then also tax rates. They may go up in 2026. In fact, they’re scheduled to go up in 2026 unless our government decides to continue the lower rates that we have right now.
Joe: So here’s another exercise that you should be thinking about, is that you want to start taking inventory of where is your money held in regards to taxation? So tax-deferred accounts. An example there would be your 401(k) plan or a similar plan, 401(k), 403(b), IRA, let’s say if you have a pension plan, things like that. So it’s all tax-deferred. I got a tax deduction going in, it’s growing tax-deferred. But when I do decide to take that money and I pull it out for retirement income, is that’s where I’m going to get taxed, right? And the tax rate is ordinary income. So depending on how much that I pull out is going to be dependent on my tax rate. The next is to look at a taxable pool. This is just an after-tax capital asset. So if you have real estate, you have mutual funds, you have stocks, bonds, and a brokerage account. It’s already been taxed. It’s sitting in that account. And then you’re paying a capital gains tax when you sell it. Or if it spits out dividends or interest or things like that, you could be taxed along the way. But that’s a taxable account. It’s tax-favored because it’s a capital asset. It’s a lower tax rate than ordinary income. In the best of all worlds would be your tax-free accounts. How much money do you have in your tax-free account? So that would be your Roth IRA, Roth 401(k), right? So what percentage do you have in each of these different accounts? If I were to guess, I would say the largest holdings that you have from a tax perspective is in the standard traditional 401(k)s, IRAs, 403(b)s and the like. However, that’s great that you have money here, but just remember that every dollar that comes out of here is going to be taxed at ordinary income rates. So a strategy that you want to think about is that, hey, can I be a little bit more diversified? Can I get money up here? How much money do I have over here, in here? So when it comes time for me to create that income, I can control my taxes a little bit better. If everything is coming out of this tax-deferred account, I have very little control on the taxes that I pay. Because every last dollar is going to be taxed at ordinary income rates.
Al: Yeah, and let’s talk about, so Roth IRAs, that’s the way to get the tax-free. You can do contributions, we just talked about that. $7000 of contribution, $8000 if you’re 50 and older. But in terms of a Roth conversion, that’s taking money out of an IRA, a 401(k), out of a retirement account and converting it to a Roth. So there’s no restrictions there. You don’t have to be working. It can be any age. It can be any amount. Anyone that has a retirement account can do a Roth conversion. Should you? The answer is possibly. You’ve got to look at your tax brackets now versus the future. And for a lot of you, I’ve got to guess that it makes a lot of sense to at least consider it.
Creating a Plan
Joe: So let’s back the truck up just a little bit more. I want you to start defining your retirement goals. Get a piece of paper. Write this thing down. Harvard did a study. They say people that write down their goals are a lot more apt to accomplish it by a huge percentage, and it doesn’t have to be anything fancy. Here’s a couple examples. Alright, I want a retirement lifestyle to live off of $75,000 per year. Okay. Hey, I like my home. I want to stay there. Or, I would like to downsize. I would like to move to Florida. I would like to retire at 66. 62. 50, assets must last at least 25 years. Some of you might have a lot longer life expectancy. Some of you might have a shorter life expectancy. I wanna leave some money for the kids. I dunno. Start defining your goals and writing them down, and then you can get tactical on how to accomplish ’em.
Al: Yeah, no kidding. And, and so let’s get into that, Joe, because once you know what you want in terms of your goals, then you can sit down and figure out how am I gonna get there? So, to create a plan, here’s what you might want to think about, and once you have your goals, is what do you need to do to take care of that, and this, and maybe you need to save $10,000 a year in our prior example. Maybe you need to develop a portfolio that’s going to make 6% or 7%, whatever it may be to get this done. Maybe you gotta figure out Social Security, what’s the best strategy for you. And then certainly have a plan B, contingency plan in case things go wrong.
Joe: Hey, you know where you get your plan B? YourMoneyYourWealth.com. Get that Retirement Readiness Guide to help you walk you through this, right? Just start a plan, write it down. And start getting tactical on the steps that you need to do to make sure that you accomplish it. To help you with that, we have the guide. YourMoneyYourWealth.com. Click on that Retirement Readiness Guide. Okay, let’s take a look at the Pure takeaway. Are you on track? First off, are you on track? You gotta get on track. Boost your savings. We talked about different ways to think about boosting some savings. Right. Consider your income taxes. If you can pay less taxes, that means more cash and more capital to you versus Uncle Sam. Pay your fair share, but maybe not a penny more, and then creating this overall strategy and plan. But you have to start somewhere. Where can you start? We’re here to help. Go to YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. You could click on it right there on your computer right now. That’s it for us. Hopefully you enjoyed the show. For Big Al Clopine, I’m Joe Anderson. We will see you next time, folks.
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.
