You’ve heard the phrase, “The best-laid plans of mice and men often go awry”? One wrong move can derail your entire retirement. Don’t let the unexpected turn your dream into a nightmare! In this episode of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA, reveal how 10 risks can break your retirement – and they equip you with the actions you need to take to make it a success.
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Important Points:
- 00:00 – Introduction
- 01:52 – Cash Flow: Income vs. Spending
- 04:13 – Social Security
- 06:03 – Calculate your free Financial Blueprint
- 07:26 – True/False: A couple who are both 65 would need to devote roughly $330,000 of savings to healthcare expenses in retirement.
- 07:54 – Health Care Costs
- 09:08 – Medicare Plans Part A, Part B, Part C, Part D
- 11:20 – The Retirement Risk Zone: 10 Years Before and 10 Years After You Retire
- 12:44 – Sequence of Returns Risk
- 14:24 – Calculate your free Financial Blueprint
- 15:14 – True/False: More than 1 in 4 people say they have no emergency savings
- 15:58 – Inflation
- 16:14 – Debt
- 16:42 – Natural Disasters
- 17:12 – Marriage
- 17:32 – Withdrawal Rate
- 18:12 – Asset Location
- 19:43 – How do I figure out if I have enough saved to make it in retirement? (Alex, San Diego)
- 22:10 – Calculate your free Financial Blueprint
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Transcript:
Joe: Hey, a lot of things can make or break your retirement. You could have a perfect laid out plan. Then boom, the unexpected happens. Are you gonna make or break your retirement? Welcome to the show folks. Show called Your Money, Your Wealth®. Joe Anderson here, president and CFP® of Pure Financial Advisors. I’m with the big man. He’s sitting right over there. Big Al Clopine, hello Big Al.
Al: How you doing?
Joe: Are you gonna make it or are you gonna break it?
Al: I wanna make it. Let’s talk about how to make it.
Joe: You know, when it comes to life, there’s a little bit of luck and some people get a little bit unlucky. Just like your retirement plan, you can make it or break it. Quick example, right? Good things. Hey, you’re living a lot longer. Bad news is you don’t have enough cash to make sure that you can provide the lifestyle with those 5, 10, 15, or 20 extra years. Are you gonna make it or are you gonna break it? That’s today’s financial focus. [music]
Cash Flow
Okay, here’s another break it. You’ve done a really good job saving. You mapped everything out. You hit retirement, and guess what? You like to travel a little bit more than you thought. You like exotic vacations, and you end up spending 10 to 20% more. You wanna make sure that you get this all dialed in. Who better to help us than Big Al Clopine.
Al: Wow. So today, make it or break it. We’re gonna talk about your circumstances, what the circumstances you find yourself in, and the factors that can affect you, and then most importantly, whether you’re going to make it or break it in retirement. So, Joe, let’s talk about make it or break it. Hopefully more about making it than breaking it.
Joe: Yeah. But life happens Big Al. When we think about it as I approach retirement, we have income, so most of you will have Social Security. If you don’t have Social Security. Hopefully you have a pension, maybe you have an annuity of some sort. Brokerage accounts 401(k)s, IRAs, Roth IRAs. So all of these different assets and income sources are there to produce the income that you need to cover the spending.
Al: Yeah. And the spending is what can break it. Right? So you got housing. Of course. We need a place to live and we’ve got taxes, we got insurance. So that’s kind of a must. We need to eat. There’s groceries. We dine out a bit, we go on vacations. You know what, we’ve just retired, or we’ve been in retirement a while. We like to travel. Joe, It’s like every day Saturday you wanna have fun, but that can break it if you go too far.
Joe: Yeah, you gotta be a little bit more responsible. You don’t wanna break it. You gotta make it right. You could downsize. Let’s say you get there and you’re spending a little bit too much money, cheaper insurance. Maybe you sell that second car that you have. I dunno. You relocate to a cheaper area. Or you staycation. That sounds like a good time, especially if you live in the, in the Midwest in the winter. But here’s what’s gonna break you.
Al: Yeah. So think about the things that you gotta think twice about, right, like that luxury car, RV, boat. You know what? I know you’re retired. You’ve been wanting this your whole life, and that’s okay. Just make sure you can afford it. Think twice before you spend money on these types of things. Home remodel. We just did a little home remodel, but make sure that you can afford it, right? Timeshare usually a bad idea. Think usually, usually say no to that. Supporting adult kids. I think most of us do that but try to minimize that or completely cut them off the payroll. Second home, Joe, I’ve got a second home, but actually we make a profit on it.
Joe: Here’s how you make more. You just make a profit on your second home, or there’s some energy rebates, you can do some side gigs, side hustles. A lot of times when people retire, they still have a lot of energy, motivations to do other things. They just don’t want the grind of the 9 to 5, right? You could find some things, consult, I don’t know, maybe host an exchange to it. We’re coming up with all sorts of ideas here today on Your Money, Your Wealth®, or you could cut your spending. So there’s different things, of course, that you can do, to make sure that you make it.
Social Security
Al: Yeah, Joe. Another thing is Social Security. And Social Security, for a lot of us, we don’t real realize how important it is. So the average couple, right, that goes through their life that the one wage earner is kind of a normal salary, one’s a lighter salary. It’s turns out to be about $1.3 million over the course of your lifetime. So you gotta make the right decisions here.
Joe: Yeah, I think a lot of times people don’t really understand the impact of Social Security to the bottom line of your overall retirement strategy. You make a mistake there, it could absolutely break you. You could take your benefits if you qualify as early as 62, or you can push it off until age 70. An example here, your full retirement age in some, depending on when you were born, will be either 66 or 67. Let’s say your full retirement age benefit is that $2,000 a month or $24,000 a year. You get a hundred percent of that benefit. Now, if you decide to take it early, you’re going to receive a reduced benefit for life. This case would be around 70% – 30% haircut. Or if you wait, you’re gonna receive an 8% delayed retirement credit each year that you wait. So you’ll receive about 124% more. So a lot of times it’s like, well, what do I do? There’s a lot of options here. Some people think of a break-even Al.
Al: Yeah. And Joe, well, one more thing on that, and that is, when you’re married, it’s even more complicated to get this right. A lot of people think of Social Security as kind of a break even analysis. You can take a look here, you take it at 62, break even point, for 67 and 70 is somewhere around 79 years of age. between 67 to. 70, the breakeven point’s about 82, so just keep that in mind, life expectancy is a factor here. Your own expected life expectancy.
Joe: The people that make it in retirement, they do a little bit of planning. What I want to do is help you with that planning right now. Go to yourmoneyyourwealth.com. Click on our special offer. It’s our Financial Blueprint. If you haven’t done it yet, do it right now. It will take you 10 minutes. You put in some information, you click go, and you’re gonna look at the good, the bad, the ugly of what your current situation looks like. Is it green all good or is it red? You need to make some changes. Go to yourmoneyyourwealth.com. Click on that special offer. It’s free of charge. Make it happen. You don’t wanna break it. You wanna make it. When we get back, we’re gonna talk about more scenarios that are either gonna make you or break you in retirement. We’ll be right back.
Health Care Costs
Joe: Hey, welcome back folks. We’re talking about making it or breaking it in retirement. We want you to make it and not break it. To get some more help with that, go to yourmoneyyourwealth.com. Click on that special offer. It’s our Financial Blueprint. It’s your Financial Blueprint. You put in your information to figure out, Hey, am I on track? Not on track? What are the strategies that I need to do to get myself on track? What are things in the red zone or what are things in the green? Go to yourmoneyyourwealth.com. Click on that special offer. It’s our Financial Blueprint. Hey, let’s see how you did on that true false question.
Al: A couple who are both 65 would need to devote approximately $330,000 of savings to healthcare expenses in retirement. True or false? Well, that actually is a true statement. Fidelity takes a look at this every year, and that’s what they’ve just come up with. $330,000. You don’t have that in the bank. Actually, maybe another way, Joe to think about it is probably 10, 11, $12,000 a year per person from your earnings need to be devoted to healthcare.
Joe: Yeah. What? It’s a big chunk of change. 330, that’s the average. So some of you, it’s gonna be a lot more than that. And of course, some of you, it’s gonna be a lot less. So let’s talk about healthcare. Making it or breaking it. You wanna make sure that, hey, there’s some habits that you can do. This is Big Al over here.
Al: Yeah, that’s what I’m trying to do. Consistent exercise, walking. Cardiovascular type exercises, treadmill, or whatever it may be for you. Resistance training. That’s very important as you get older. A balanced diet, we all know about that. We don’t always succeed at that. More plant-based, more whole foods definitely wanna go that way. Do everything in moderation. And Joe, staying active, right? Make sure you’ve got lots of activities, whether it be as volunteer or with friends or grandchildren or whatever it may be.
Joe: This is the fun side, I guess, right? Smoking, alcohol, hanging out, watching tv, just getting overweight, enjoying life. Yeah. Well, this will help your finances because your life expectancy will be a little bit shorter. this will, you know, you’ll have fun and happiness, but, you’re gonna live a lot longer, so you wanna make sure that you plan.
Medicare Parts A, B, C, and D
Let’s talk about insurance once you hit retirement. Medicare. All right, so you got part A, part B, part C, and part D. The alphabet soup of Medicare. Al, part A, what is it?
Al: Part A is hospital insurance, Joe and, and so that’s something that doesn’t cost you any additional dollars when you sign up for that. Part B does cost you. So that’s for medical insurance. So you do, you generally pay for that outta your Social Security. In other words, your Social Security benefit is reduced by your Medicare premium payments, and those are impacted by your income. Then I’m gonna skip to D. Part D is for drugs. Those three kind of go together. Part C is kind of all on its own. It encompasses all three of them. So you kinda look at A, B, D, or C.
Joe: Make it or break it. Looking at here, Medicare, we wanna make sure that you have the right coverage in place. There’s all sorts of different types of plans really, depending on health, history, longevity, deductible details. Understand the deductibles that you go into. Do you want large deductibles or do you want very low deductibles? Your doctor choice? Do you wanna be in network? Out of network? Do you love your doctor or do you, you don’t care. You just want someone to take a look at you. Travel coverage. Yeah, Big Al, he travels the world. If he gets sick and needs to go to the doctor, he wants to make sure that he can.
Al: Yeah. And then Joe, break it. There’s a lot of things that can break the Medicare. So first of all, like missing the enrollment period. So you may not have insurance for a year. You gotta go get insurance on your own, which is quite expensive. And if you miss that enrollment period and when you later enroll, you’re gonna be paying more for Part B Medicare for the rest of your life. There’s a penalty. It’s not just one year, it’s every single year. So make sure you get tight on when to go ahead and apply for it. It’s 65 for most people, unless you’re actually working. Then it can be a little bit longer. Medicare costs, a lot of people don’t realize you’re paying for it. Usually it’s deducted from your Social Security benefits, so you may not feel it, but it’s reducing your income. And then finally, if you are working and you apply for Part B, that insurance, the work insurance may be secondary to the Medicare, which you may not want.
Retirement Risk Zone
Joe: Alright, let’s switch gears a little bit. Now you’re approaching retirement. We got the risk zone here. Retirement a risk zone. What the heck is that? Well, that’s 10 years before and 10 years after. So here, you’re saving money and you’re building up this nice little nest egg. How you wanna start thinking about transitioning into retirement from a portfolio perspective. It can’t be the day you retire, right? It’s like, Hey, I have all stocks. I wanna retire tomorrow, so now I’m going to get more conservative. Because you don’t know when the market’s going to react. So you slowly gauge to make sure that you have a path in place to change that portfolio to create more income potentially then growth, really, depending on what target rate of return that you need. And then this 10 years after retirement is crucial to make sure that you have the right portfolio in place. There’s something that’s called sequence of return risk, right? On average, you might get 6, 7, 8% on your money, but it doesn’t happen every year. Some years you get 10%. Some years you might lose 15. Then the next year you’re up 20, then down five, whatever the case may be. An average is just an average. It means nothing when you are pulling dollars from your account, because when that market reacts negatively and you’re pulling dollars from the account, it will break your retirement. Al, show ’em.
Sequence of Returns Risk
Al: Take a look at sequence of returns. So you earn 6%, you take out 5%. So the green line, your money actually goes all the way to age 95. Now realize that’s if you get 6% each and every year, it never happens. So you can’t really judge that you’re gonna be safe for 30 years, but that’s what the illustration shows. Now, what happens if you have a 15% decline? At age 67, a couple years after you retire? Well, look what happens. Your money runs out by age 87. That’s a completely different scenario. Or what about at age 80, 15% decline at age 80? Now you’re only going to 91. So the, the way that you get around this, Joe, is make sure your portfolio is appropriate for your distribution plan.
Joe: Yeah. In other words, you wanna reduce your risk exposure. You wanna make sure that you’re looking at your withdrawals each and every year. Have a strategy on how you’re pulling dollars from the overall portfolio. You don’t necessarily want to have it fixed. You want to be mobile with that. And of course have some cash on hand so that you can use those emergency funds if the market craters, that you don’t necessarily have to sell stocks. But this is where people get into trouble, Al.
Al: Yeah. And, and breaking it. That’s pretty obvious. A high risk portfolio when you’re taking money works completely differently than when you’re saving. High risk volatility when you’re saving is okay, ’cause you buy shares cheaper. When you’re withdrawing, you take money out while the stock market’s down, it’s hard to recover. Fixed withdrawal. So you may have to, if you take the same withdrawal every year when the market’s down, you may end up in trouble. And then if you’ve got two higher risk investments, it may be harder to generate them into cash when the market’s down.
Joe: Alright. Lot of stuff we’re throwing at you. Are you gonna make it? Are you gonna break it? Why don’t you find out? Go to yourmoneyyourwealth.com. Click on that special offer. It is our retirement Blueprint. Get in there, put your data in, and find out if you will make or break retirement yourmoneyyourwealth.com. Click on that special offer. It’s our retirement Blueprint. We gotta take another break. When we get back, we’re gonna do a little rapid fire for you. Make it or break it. A lot of things can help you, a lot of things can hurt you. Then we’re gonna flip the show to you and answer a couple questions. Don’t go anywhere. Show’s called Your Money, Your Wealth®.
Other Retirement Risks
Joe: Hey, welcome back folks. Show Called Your Money Your Wealth®, Joe Anderson and Big Al hanging out here helping you make it in retirement, not break it. [music] Got a lot of fun facts coming up. Don’t go anywhere. But before we get to that, let’s see how you did on the true false question.
Al: A recent survey found more than one in four people say they have no emergency savings. True or false, Joe, it turns out that that’s true.
Joe: Yeah Al, 27%, a third of us, do not have any cash whatsoever in emergency saving. I think that number’s even high, I would say a lot more have no emergency savings.
Al: I would, I would think so too, Joe, and, and it’s kind of obvious, right? Your car breaks down, you need new tires, whatever it may be, and you don’t have the money to pay for it. Now you’re trying to get into your investment portfolio at the wrong times, and you want to save that investment portfolio for your retirement income.
Joe: Alright, make it or break it. Inflation.
Al: Yeah. A lot of us don’t really consider inflation when we’re thinking about retirement. We know it’s there, but we forget about it. Here’s an example. 3% inflation. Something that costs a hundred dollars today, in 10 years, it’ll cost $134.
Joe: Let’s look at debt, make it or break it. Average debt carried annually is around $9,000. Average interest rate on that credit card debt, 25% right. It’s $272 average monthly payments over 53 months, you’re gonna pay an additional almost $6,000 on that credit card, right? Looking at high interest rate debt will break you. Next. Natural disasters. You can’t control this Big Al.
Al: Natural disasters. You can’t really control ’em, but you do wanna make sure you have appropriate insurance. Now, insurance keeps going up. Make sure you got the budget for that. But if you have a problem, there’s recovery costs. There could be even a loss of home where we’ve got an illustration of a tornado. Hopefully you’re not in tornado alley, but there’s things that can happen. Just be aware, this is something that can break your retirement. Make sure you got some extra resources for things that could happen.
Joe: Looking at marriage. This could make or break you for sure. Some of you is like really on the make side. Yes. So I’m, oh man, that really broke me. So you just want to have good communication with the spouse. Live together, but also make sure you have your individuality, divorce, and death, though, that could definitely break you.
Withdrawal Rate
Al: Well, another thing that can make or break you is your withdrawal rate. And of course it depends upon a lot of factors, your life expectancy, your spending, how much income you got coming in and so forth. But you know, a lot of times we say 4%. That’s a good number and that’s at least kind of a starting point. But consider this: for a 30 year period, if you have a 40% in stock and 60% portfolio, right? Then you probably only would get by with about 3.7%. In other words, under 4%. And this is something that, we like to say is not gospel, it’s just a guideline. But just be aware when you’re taking less risk in your portfolio, you might have to reduce your withdrawal rate.
Asset Location
Joe: Alright, asset location, this is also key. If you could save a little bit of money in taxes, your money is going to stretch all that much more. Three different pools of money that you can invest in. That’s the tax deferred is the biggest one that most of you have. IRAs 401(k)s pre-tax contributions going in. Grows tax deferred, which is great, but when you pull those dollars out, you have to pay at current ordinary income rates. You got a taxable account. This could be a brokerage account, anything outside of this tax deferred, right? Your retirement accounts, non-retirement accounts. So you purchase a stock, a bond and mutual fund, maybe it’s real estate. Those assets grow once. You sell those assets. You have a capital gains rate. If it’s more than a year, it’s a very favorable rate. If you sell it in that year, well, it’s just like a tax deferred asset. It’s gonna tax at ordinary income. Then you got tax free. This is really good. All right, so the money will continue to grow for you. It’s an after tax contribution, but you’ll never ever pay taxes on those dollars again. An example here would be a Roth IRA. So looking at asset location and also diversification from a tax perspective, you just wanna make sure that hey, if a hundred percent of my assets are here, I have very little diversification from a tax perspective. I wanna be thinking about taxes not only today, but in the future because in retirement is probably the best time, an only time that you can truly, truly control your taxes to the best of your ability. Hey, let’s switch gears folks. We got a couple of questions from you, our viewers. Take it away Big Al.
Viewer Question
Al: So this is from Alex in San Diego. “How do I figure out if I have enough saved to make it in retirement?” Well, that, Alex, that is really the key question. So, and I think everyone wants to know, do I have enough to retire? You have to do a little math, so I’ll give you a quick formula. Take a look at what you think your retirement spending is going to be. Then subtract out your fixed income, right? Social Security, pension and the like, and you’ll end up usually with what we call a shortfall, right? Shortfall. Whatever you need from your investments, take that shortfall, whatever it may be, multiply that by 25, and that will tell you approximately how much you need to have in assets.
Joe: All right? This is what Alex is trying to figure out is, alright, well how much money do I need right here? Because this is my retirement. This is when I’m accumulating, so I’m saving dollars here and I’m spending dollars here. So it’s like, well, how much money do I need here? So the question is, is that it’s a just a quick formula that’s easy that will give you in the ballpark. Is to look at, all right, well, how much money are you spending, as Al said, right? So whatever example that you wanna run, is that all right well, let’s say you wanna spend a hundred thousand dollars. That’s my goal, and I wanna spend that for the rest of my life. Second step is what is your fixed income? So let’s say you have Social Security, you and your spouse, have $60,000 of Social Security. So that means you have this shortfall of $40,000. So this needs to come from your portfolio. So how much money do you need here? Well, you can multiply that by 25, which would give you roughly a million dollars that you would need to have as a nest egg to create this $40,000 of income. So couple of ways to look at it. This is basically the 4% rule. You don’t want to take out any more than 4% outta your portfolio. But now you reach here, as we discussed, this is where the real work happens. Not to say saving up to a million dollars is no work, but I think from a planning perspective, this is where it will break you. This will make you.
Al: Yeah, a hundred percent agree, because it’s that withdrawal strategy that a lot of people don’t really know what to do.
Joe: Alright, that’s it for us today. Hopefully you make it in retirement. Again, if you need a little bit of help, if you need that blueprint for your retirement, go to yourmoneyyourwealth.com. Click on that special offer. It’s our retirement Blueprint. We will tell you from several different areas of your financial life. Hey, green, you’re good. Yellow. Hey, you got some work or red, you’ve got a ton of work to do. Go to yourmoneyyourwealth.com, click on that special offer, free of charge. You can do it right there in your pajamas at home. Takes you a couple minutes. Then it’ll give you the information that you need to take action so you can make it, not break it. [music]
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 CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification.
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.
