Your outdated, tired, set-it-and-forget-it financial plan needs a money makeover! Assumptions you make about your finances can make or break your retirement lifestyle – will it be bad or beautiful? Joe Anderson, CFP® and Big Al Clopine, CPA show you how setting goals, revamping your portfolio, and doing a tax turnaround can give your retirement plan the financial facelift it needs.
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Money Makeover:
- Set Goals
- Financial Facelift
- Portfolio Revamp
- Tax Turnaround
Important Points:
- 00:00 – Intro
- 00:34 – Average Monthly Expenses
- 00:58 – Retirement Spending
- 02:57 – Set Goals for Retirement
- 03:00 – Who Has a Written Retirement Plan?
- 04:34 – How Much We Overspend
- 04:47 – Create a Budget
- 05:45 – How Much You Should Have Saved for Retirement
- 07:21 – Money Makeover Guide – free download
- 08:11 – True/false: Nearly half of Americans age 55 plus are retired
- 09:06 – Financial Facelift Example: Cashflow Projection
- 11:29 – Withdrawing From Your IRA vs. Emergency Savings
- 12:42 – Portfolio Revamp: Consolidating Retirement Accounts
- 14:11 – Money Makeover Guide – free download
- 15:14 – True/False: Most workers max out their employer match
- 17:27 – Tax Turnaround
- 19:13 – Roth Conversions and Required Minimum Distributions: The Benefits of Tax Diversification
- 20:20 – Ask Joe & Al: What kind of assets should I select to put in a Roth conversion? (Scott, MN)
- 22:07 – Pure Takeaway
- 22:53 – Money Makeover Guide – free download
Transcript:
Joe: When is the last time you looked at your overall retirement strategy? For some of you, it might be time for a money makeover.
Welcome to the show, everyone. Joe Anderson here. I’m a CERTIFIED FINANCIAL PLANNER™, President here of Pure Financial Advisors. And of course, I’m with the big man, Big Al Clopine. Hello, Big Al.
Al: How you doing?
Joe: You ready for a little makeover?
Al: Might as well.
Joe: It’s a fight.
Al: Let’s look better.
Joe: Yeah. Yeah. What better time to do this than right now? It’s a money makeover. First things first, take a look here. People are spending a little bit more. 2016, the average monthly expense was $3500. You fast forward to 2021 given inflation and given people wanna spend a little bit more, it’s almost up $1000 a month. That’s $12,000 per year. Are you prepared for that? That’s today’s financial focus. 49% of people, retirees, they’re saying you know what? We’re spending a little bit more money. This is so common. I think when people approach retirement, a lot of you say, hey, I’m going to spend less in retirement than I’m spending right now. But guess what? When you’re retired, it’s Saturday every day. And what do you do on Saturday? Well, you find time to potentially spend money. 49% of you are spending more than you thought. Now is the time for a money makeover. And who better to help us, is the big man himself, Big Al Clopine.
Al: All right. Today we’re talking about your retirement plan makeover. So. What do we do? First of all, always, you want to set your goals. What are your goals? When do you want to retire? How much do you want to spend in retirement? Right? What does that look like? Do you want to buy another home, a boat? Whatever it may be. Right? Travel a lot more. Volunteer. Then it’s like a financial facelift. Let’s like figure out, okay, what your goals are. How do we get there by, by kind of massaging your finances, saving more, whatever, working longer, working less if you’re financially independent. Then let’s take a look at your portfolio. Is your portfolio in line with your goals and your finances in terms of meeting what you want to do? And then finally, tax turnaround. There’s lots of ways to save taxes in retirement. That’s important, right? Because we’re stretching those dollars as much as we can. So, Joe, perfect topic, I think, for the time. It’s, we all need a little bit of makeover sometimes.
Set Goals
Joe: Yeah, of course. But here’s the problem, I think, is that most people focus here, right? Where you have to start here is setting goals. What are you trying to accomplish, right? And then get that roadmap in place. I think we’re so focused on the overall portfolio. What is the market doing? How much money do I actually have? Versus hey, what do I need to set myself up for making sure that my finances are in order? Then you can work on the portfolio. So let’s take a look, 16,000 workers were surveyed and they’re saying here in the blue 41% of people have a plan. But it’s not written down. If it’s not written down, in my opinion, it’s not necessarily a plan. It might be in our head hey, this is kind of what I’m thinking. You have to write it down. Only 17% of people actually have a true plan in place. 38% of people have no plan. Some people just don’t know.
Al: So let’s talk about what goes in a financial plan, right? So- and it could be real simple. It could be on one page, just like you said, Joe. Here’s the main elements. Evaluate your financial situation. Think about what you have, right? Set goals. So you’re 54, you want to retire at 65, how much do you have, right? Think about how much you want to spend. These are all your goals. Then consider your investment options. Only then, right? You look at what you have, you look at what your goals are, and then you match your investments to be able to get there. Put your plan into action and then monitor your progress. Very important because you can set a plan, which is great, but life changes. Life changes all the time and you got to monitor and make course corrections as necessary.
Joe: Yeah, you have to be disciplined in the overall strategy that you put together. A lot of times we might, all right, have goals and we kind of evaluate our overall situation. You set a plan in place, but then again, you go off course and you don’t monitor it. You don’t reevaluate. So putting all of these together, I mean, it’s simple, but it’s not easy, right? So writing it down, making sure that you understand what you currently have, and then put that thing into play.
Al: So CNBC, I don’t know how they came up with this, but they figured out, on average, we are spending $7400 more than we’re actually making. So your earnings plus adding more debt equals your spending. That’s a recipe for disaster.
Joe: Here’s a good example. $8,000 of income. Let’s say your needs, right? That’s shelter. That’s food. That’s clothing. That’s $4000. You want to save a little bit. So maybe that’s 1.6. You’re saving 20%. And then your wants is 30. So what you don’t want to do is put your wants up front. Right. You got to take care of the needs and then make sure that you’re saving. And then if there’s things left over, then that’s when you can start looking at your wants.
Al: Well, and I think that’s a good way to think about it, right? I mean, you have your needs. I mean, you’ve got rent, mortgage, whatever those things are, right? Utilities, food, transportation, right? But then think about savings as the next thing, right? Make sure you’re getting enough saved to accomplish your goals in retirement. And then finally, now whatever’s extra, that’s what you can- you can buy things or have- or go places that you would like to go instead of doing that first and saving second or third, I should say, because if you do that, you probably won’t say much of anything.
Joe: Let’s just have a quick check here. Annual salary. How much money should you have saved? So if you’re in your 40s, you should probably have anywhere from 3 times your overall annual salary. So if your annual compensation is $100,000, you know, around $300,000, that’s probably a pretty good number. If you’re in your 50s, you need 6 times. So now that $300,000 needs to double, so around $600,000, if $100,000 is your annual comp. And then when you hit your 60s, it’s roughly 10. Now these are rules of thumb that’s pretty high level, right? But it gets you in the right zip code, if you will. So if you’re at one one-time salary and you’re in your 50s, you’re probably a little bit behind. However, if you have a very large pension that will cover your annual expenses, then hey, you’re probably right in line. So just, this is a reality check, if you will, where are you at, given your age and given the amount of savings that you have, will set some goals to try to get that up there.
Al: Yeah, I think that’s a good point. And when you think about 10 times salary. So a 10 times salary, so $1,000,000 if you make $100,000. Okay, that’s going to generate about $40,000 of income, 4% rule, right? So that’s not enough. But when you take pensions and Social Security, maybe you get closer to 80%, which is a common thing that people say maybe you spend 20% less in retirement, maybe because you’re not saving, right, or you don’t have Social Security taxes, things like that. But at any rate, these are only guidelines, and just to see, are you approximately in the right place.
Joe: Hey, if you want help with this, you know where to go, go to YourMoneyYourWealth.com. Get that Money Makeover. Get the Money Makeover, it’s our gift to you this week, YourMoneyYourWealth. com, click on our special offer. 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: Hey, welcome back to the show. Show’s called Your Money, Your Wealth®. While Joe Anderson, Big Al helping you out with a little money makeover today.
Go to our website, YourMoneyYourWealth.com. Click on the special offer if you want the Money Makeover guide. It will walk you through different things, different steps, what you want to take a look at to refresh that overall retirement. YourMoneyYourWealth. com. Click on the special offer. Hey, let’s see how you did, folks, on that True/False question.
Al: Nearly half of Americans ages 55plus are retired. True or false? Well, let’s see. I guess the average retirement age right now is between 62 and 64. 55 plus probably means 55 to 120. I’m going to guess that’s probably true, but what do you think, Joe?
Joe: Here it is! 48% of Americans are retired by 55 plus. But here’s a real statistic that you want to make sure that you’re thinking about, is that a majority of people actually retire a lot earlier than anticipated.
Al: And we see that study after study, that people end up retiring sooner than they thought because of a change in their circumstance, right? Ailing parent, ailing spouse, right? Lost a job. In some cases, the job passes you by. You’re not keeping up with the technology that someone in their 20s and 30s is, so just factor that into your thinking.
Financial Facelift
Joe: Let’s take a quick look at an example here. You got John and Sally. They’re 57 years old. John makes $150,000. Sally makes $125,000. And you know, they have a combined 401(k)s of roughly $1,000,000. They have about $50,000 in cash. All right, so they’re spending around $140,000 a year and they’re thinking, hey, I want to retire in a few years. And they’re putting their goals together and they’re thinking, hey, maybe I’ll spend 80% of what I’m currently spending now. And let’s just assume a 6% rate of return and 3% inflation on the money. So given these assumptions, let’s see what happens here. They retire at 62. They’re saving about $5000 a year in their overall accounts. They have Social Security at $25,000. But the money runs out, right? This plan doesn’t necessarily work. So when you start strategizing and putting things together, you want to put your ideas and goals through a stress test. That’s what they’re doing. They’re like, alright, well let’s run some assumptions and let’s see how far this money lasts. However, they’re running out of money at age 82, but there’s levers they can pull, Al.
Al: They can always work a little bit longer, right? They can save a little bit more. If you work longer, you’re not tapping into your resources to further to grow. Social Security is often higher, right? Maybe if you have a pension, maybe that’s a little bit higher. Maybe you work part-time, maybe you downsize your expenses, maybe you downsize your home, all kinds of ways to do it. So we’re not saying you have to work till 70. But you want to look at this and figure out those levers that are going to work for you to still retire when you want to.
Joe: This is kind of an extreme example here. Let’s say if they just push out their overall retirement a couple of years, and they increase their savings substantially, right? Well, of course, their money is going to last, right? But there’s a lot of levers that you can pull here. Maybe you reduce your spending. Instead of spending 80%, you spend 75% of what you’re currently doing. You work until 67. Maybe instead of saving $5,000 a year, you can save $10,000 a year or maybe $7,500, right? There’s all sorts of different things that you can do. The point of all of this is that you want to make sure that you’re stress-testing what you’re currently doing. Is it going to last? Is it going to make it given market conditions, given your health? Are you living- or are you going to live a lot longer? Cause you’re in really good shape or you might have declined health. There’s all sorts of things that you want to make sure that you’re looking at in regards to your retirement strategy.
Al: Let’s talk about IRAs because that’s an important part of your retirement. And we are tempted at times to pull money out of IRAs because of one situation or another. But here’s what happens when you do. You don’t really get near as much as you think. So here’s an example of $100,000. You pull the money out of an IRA. You’re not 59 and a half yet. You’re in your 40s, right? So you gotta pay federal taxes. You gotta pay state taxes. You gotta pay that 10% penalty. Some states have penalties to go on top of that. We live in California, it can actually be about 50%. In this example, $38,000 is your taxes. You really only get about $62,000 out of this.
Joe: So if you think about it, you lost $38,000. What was the opportunity cost of that loss, right? If you just held that $38,000 and you invested it, it’s worth a few hundred thousand dollars. So just think twice as you start looking at pulling dollars out of your retirement accounts a little bit early because it could cost you substantially.
Portfolio Revamp
Al: So let’s talk about portfolios and portfolio revamp. Many of you, we know this because we talk to you all the time, you’ve had several employers. You have several 401(k)s. You have different custodians, you got money in the bank, you got a piece of real estate or two, it’s all over the place, right? And so it makes it much more complicated to move forward and try to figure out how to plan and what you have going, what, how you’re doing on your investments.
Joe: This gets a little bit challenging as you approach retirement. So if you have multiple accounts, how do you manage the risk? Because you have multiple accounts in different places. How are you rebalancing the overall accounts? How are you tax managing it? So as you approach retirement, it might make sense to consolidate a little bit. You can monitor the investments, potentially you could lower your fees. So if you have accounts all over the place, you could bring it to a discount brokerage, buy very low-cost investments that could help the overall performance. And then when you’re preparing your taxes, you’re not getting these 1099s and- from 4 or 5, 6 different areas. So consolidation in most cases is probably a little bit easier, especially as you get older, when you have to start taking required distributions. If you have multiple 401(k) plans, you’re going to have to take multiple RMDs. If you have one IRA, boom, you can just take that one RMD.
Al: Let’s say you got 5 different 401(k)s from 5 different prior employers. You have to take 5 different required minimum distributions. Different rules than an IRA. You can have 5 IRAs and take one required minimum distribution for that part, but every single 401(k), you’ve got to do a separate one. You can’t consolidate them. If you do, penalties, interest, extra taxes.
Joe: Hey, if you need more help with this, if you want to break it down, we got our Money Makeover guide. Go to YourMoneyYourWealth. com, click on that special offer this week. You can download it right there on your computer, absolutely free of charge. YourMoneyYourWealth. Com. We’re going to take another break. We’ll see you in a sec.
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: Hey, welcome back. Show’s called Your Money, Your Wealth®. I’m Joe. He’s Al. We’re giving you a money makeover today.
We wanna make sure that you are setting yourself up appropriately for retirement. If you’re currently in retirement, it might make sense to do a little money makeover. Check everything out to make sure that you’re still going to accomplish your goals. If you want a little bit more help. Go to YourMoneyYourWealth.com, click on our special offer. It’s our Money Makeover guide this week. Let’s see how you did on that True/False question.
Al: Most workers max out their employer match.” Presumably on a 401(k). I hope it’s true. Joe, what, what, what are the stats?
Joe: People are getting more responsible in their overall savings. I think financial education is key and more and more people are getting that education. So if you look here, this is done by Vanguard in 2023, is that 17% of employees within those plans are at the match. Okay? 52% of people that are participating in this survey, they’re above the match.
Al: That’s surprising. That’s good.
Joe: Speaking of a few percentages, how big of an impact this can make in your overall retirement. Because when you check the box, it’s like, all right, well here, of course, I want to save into my 401(k) plan. Maybe you check 1%, 3%, 5%, whatever, whatever the case may be. But let’s just say you make $80,000 a year. And you get a 3% raise every single year, and you’re going to put 2% of your overall compensation into the 401(k) plan, and the company’s going to match you 1% on top of that. Alright, so that’s 3%. Over this time period, you got $119,000. Pretty good. But let’s say, all right, well, here, you’re just kind of playing with the numbers. Maybe you go 6% versus 2%, right? Or maybe you go 4%. Just a few percentages of your overall annual comp each year, you’re going to get a higher match because the more you participate in the overall plan, in most cases, the company’s going to match you more. So $119,000 to $356,000. So I think just looking at this each year, you probably want to ramp up that match or ramp up your contribution, maybe 1%, maybe .5%, whatever that you can do.
Al: Well, I think so, too. And we find a lot of people are undersaving, right? And if that’s you, then just try to add a little bit each year. The goal, by the way, is to get up to about 15% or even 20% of your income. That’s what you want to be saving. But for many people, that’s virtually impossible. But if you’re 2% now, next year try to get 3% or 4%. Maybe the following year you’ll get 5% or 6%. And keep going. Get as close to that 15% or 20% as you can. You’re going to be very happy later on that you’ve done that.
Tax Turnaround
Joe: Let me walk you through taxes, maybe in a different way than you’ve looked at this before. We’re going to have tax law changes here in the next couple of years. So we have probably two years left to take advantage of these pretty low rates, 22%, 24% and 32%. The 22% tax bracket is going to revert back to the 25% bracket. The 24% tax bracket is going to go to 28%. And this is where AMT falls in, that nasty alternative minimum tax. And then you got 32% is jumping to 33%. So let’s look at the highest bracket here that we’re illustrating. 32% or 33%. There’s your income levels. Okay, $1,000,000 of income, $500,000 or zero. Okay, so here’s where the 32% kind of tax bracket goes. And then here’s where your 24% to 28% tax bracket, and then here’s the 22% and 25%. So given this example, is that we have a couple that wants to spend about $140,000 per year. Most of their dollars are in an IRA or 401(k) plan. So as you pull dollars from a 401(k) plan, it’s going to be taxed at ordinary income rates, and you’re going to get stuck in these brackets here. So if you illustrate a tax projection, if you kind of look at your situation out, you’d probably make different decisions. Because here they’re still working, right? Hey, they’re in that 22% or 24% tax bracket. But then all of a sudden, for a few years here, they’re in a 0% tax bracket. How could that be? Because they retired, they might have some cash on hand, they might have some brokerage accounts that they’re spending off of. Right? And then they run out of those, and then they’re going to spend the overall retirement accounts. So if you can see where you fall from a bracket perspective, it might make sense to diversify your taxes. So if all of your money’s sitting in a retirement account, it might make sense to have some tax-free dollars, such as a Roth IRA. Or maybe start still building up your non-qualified accounts, or your brokerage account, or non-retirement, that will be taxed at a capital gains rate. The problem that we see is that most of the assets that you hold are in a retirement account are gonna be stuck at pretty high tax rates. If tax rates are going to go up, it might make sense now to put yourself in a better position to control those taxes long term.
Al: Yeah, I think that’s well said. A lot of people don’t really think about this until they get to retirement. Or, at least when they get to the required minimum distribution age, then all of a sudden they’re pulling a lot of money out of their IRAs and their 401(k)s and their taxes are a lot higher than they thought. So if you can think about Roth contributions, right, contributing some of your income to a Roth IRA if you qualify. There’s back door Roths if you don’t qualify. If you think about Roth conversions, taking money out of an IRA. Or, in many cases, a 401(k), converting it to a Roth IRA. You pay taxes on what you convert, but all future income growth principle is tax-free.
Joe: Alright, let’s switch gears here. Let’s turn the show over to you.
Al: This is from Scott in Minnesota. “What kind of assets should I select to put in a Roth conversion?” I like the conversion idea. That’s taking money out of an IRA, converting it to a Roth. As we just mentioned, you’ll pay taxes on that, but all future growth income principle is tax-free, not only for you, right, but for your spouse, if you pass, for your kids, if you both pass, it’s a very good thing. When you think about the Roth IRA, then you probably want to put asset classes that have higher expected returns, right, stocks right versus bonds. Why? Because stocks tend to grow more over the long term than bonds and you get rewarded for that growth by paying no tax. So that’s, I think, how you want to think about Roth IRAs.
Joe: Yeah, a conversion is a technique. The Roth IRA is actually the account, right? And so the people get confused. Conversion is what you’re doing is you’re taking money from a retirement account, converting that to a Roth account. The difference between a Roth account is that all future growth grows 100 percent tax-free. The difference of a retirement account is that all future growth is going to be taxed at ordinary income rates. So if you think about it, would you rather have an asset class that has a potential for higher growth in your Roth? Sure, right, because you don’t have to pay tax on it. But understand that if you’re going to pick those types of asset classes, you could lose money too. So it’s challenging to get money into the Roth because you can either do it through contributions or conversions. It’s after-tax contributions. So you wanna make sure that you don’t go overboard and go super risky, but just understand that you’re not gonna be taxed on those. So having more equities or stocks in those accounts is probably a better solution. All right, what did we learn today, Al? First things first, you have to set goals Figure out what you want to accomplish. Is it retirement? Is it putting the kids through school? Is it leaving a legacy? Set your goals and then you want to make sure that you do this financial makeover, financial facelift, whatever you want to call it. Just start documenting what you have, where you want to go and start charting how to get there more effectively. You might have to revamp your overall portfolio, right? If you had set it and forget it for the last 10, 15, 20 years, and you’re approaching retirement or in retirement. That strategy to help you accumulate wealth needs to change as you’re taking distributions as you’re creating retirement income. So do you have the right portfolio or do you have the right strategy in place? And then of course you don’t want to forget about taxes. If you want more help with this money makeover. Go to YourMoneyYourWealth.com, click on that special offer. That’s our gift to you this week. And that’s it for us this week.
Hopefully you enjoyed the show as much as I did. We’ll see you guys again next week.
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.
