When you think of retiring, what age pops into your head? 55? 65? 70? For many, visions of getting a gold watch and riding off into the sunset are no longer the reality of what retirement looks like. Not only is this vision of retirement a thing of the past, so is the target age for retiring. According to a recent survey, by The Harris Poll on behalf of TD Ameritrade, 50% of people retire earlier than they expected. How would you recover financially if your retirement plans got cut short? Financial professionals Joe Anderson and Alan Clopine discuss the tools and strategies to pivot financially if you have to unexpectedly retire.
Important Points:
(00:54) – Early Retirement
(01:19) – Why do Workers Retire Earlier than Expected?
(01:58) – Early Retirement: How to Pivot Financially
- Checking Your Numbers
- Pivoting to New Health Insurance
- Getting Social Security Right
- Tax-Smart Withdrawal Strategies
(02:58) – Retirement Target By Age
(03:51) – Approximate Annual Spending in Retirement
(06:11) – Ways to Reduce Your Retirement Shortfall
(09:41) – Health Insurance Considerations with Early Retirement
(11:08) – Social Security – How Do You Qualify?
(11:31) – Social Security – What Age Can You Start Collecting?
(12:05) – Claiming Social Security
(13:37) – Social Security – Spousal Benefits
(18:23) – Tax Triangle
(20:28) – 2021 Tax Brackets
(22:36) – Ask the Experts
(24:33) – Pure Takeaway: Early Retirement: Pivot Financially
- Understand How Much You Can Spend
- Make Sure You Have Health Insurance
- Have a Good Social Security Claiming Strategy
- Save Taxes Throughout Retirement
Transcript
Joe: You know, when you think of a comfortable retirement, most people think I’m going to retire at 65, retire from the company for 40 years, get the gold watch, the nice pension, collect a little Social Security and live happily ever after. Guess what? That’s not today’s retirement. By any stretch of the imagination, people are retiring significantly earlier in, sometimes earlier than they even want to. Stick around and figure out how to pivot if that happens to you. Welcome everyone shows called Your Money, Your Wealth. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™ and President of Pure Financial Advisors. And of course, this show won’t be a show without Big Al Clopine.
Al: Good morning, Joseph.
Joe: Hello. They are you ready to pivot your financial life? I love that word. It’s pivot. You just got to pivot. That’s right. You got to pivot. Things get thrown at you guys. So you got to figure things out. Because here’s the true facts. When you look at this, 50% of us will be forced into an early retirement. You think you’re going to retire at 65? You’re 60? Guess what? They pull the plug on you. 50% are forced into early retirement if this does not motivate you to take action. I don’t know what does. That’s today’s financial focus. So what happens? Why are people forced into early retirement? It’s not necessarily financial independence, because that’s not a force out, that’s a walkout. Here’s what’s going on. 38% of individuals have health issues, and this might not be your own health. It could be a loved one, maybe a spouse. A lot of you have aging parents that maybe you have to take care of, so then you have to leave your job to take care of them. About 22%, you’re getting laid off right out with the old, in with the new or here. 11% caregiving. Right? Let’s break things down. Let’s bring in the big man. Big Al Clopine.
Al: With the pandemic, a lot of people have been forced into early retirement. So what do you do if you’re facing that situation? I think the first thing is to look at your finances, check the numbers, figure out Can you retire early? You’re going to have to go back to work. Can you actually retire early? Figure out what you can spend based upon your own resources. So that’s number one. If you retire early before age 65, you’re going to have to think about health insurance. So we want to talk about that. Social Security is another big one. There’s decisions to be made that will affect the rest of your life in terms of your income. And then finally, we don’t want to forget income taxes, because if you can manage your income taxes appropriately, you can save a lot of money and make your investment dollars stretch that much further. And I think I mean, this is a topic with the pandemic that a lot of people have been faced with this. It’s like they’ve been laid off or they’ve had loved ones or themselves that have health issues. And so they have to retire.
Joe: Yeah, without question. So this is extremely important and it needs to be on the forefront of people’s minds in regards to, you know, their overall retirement or financial health. Right. Because when you look overall right, retirement is so far away. When you’re in your 40s, it’s like, Man, I’m going to retire like in 30 years. You don’t really think about it. And then you hit your 50s. The average target ages mid 60s, 60 to 69 target age. And so you’re going to retire at age 70. That’s what I would suggest, right? So these are some targets, but it’s like, All right, well, when do people actually retire? Is that man average is 64, women is 62. We talked to most people today and it’s like, Yeah, I don’t think I could retire early. I’m going to have to work until age 70. But guess what? We are retiring earlier, so you’ll just want to make sure that you’re prepared.
Al: So right off the bat, take a look at your liquid assets, your investment assets. These are in your retirement accounts, non-retirement accounts. And this example, it’s $500,000. So we use something called the 4% rule, which you know you may want to use 3% if you if you’re younger, but 4% just to give you an idea. So, 4% of $500,000 is approximately how much you could spend on that portfolio per year. That’s $20,000. Then you want to add up your fixed income, maybe Social Security, maybe pension, maybe rental properties, whatever. In this example, that’s another $35,000. So with $35,000 plus the $20,000 you could spend from your portfolio, that’s $55,0000. That’s what this would suggest that you can spend. But Joe, a lot of times people are spending more than that, you know, like 70,000, 80,000, 100,000 and they find they can only spend $50,000. So then you’ve got to make some adjustments.
Joe: Yeah. Well, I think this is really important because let’s say if you you lose your job and you get another job and you’re making a little bit less, guess what we makedo. We figure it out, right? And look at the same if you are retiring early or if you just hate your job so much and you just want to get the heck out, right? Trust me, I know what you’re going through. You have $500,000, right? Let’s see. You have that 500. Do you take 4%? 20, you add 55,000. You’re like, OK, that is my new salary. That’s the mindset that you have to have. Can you live off of $55,000? Guess what? A lot of you can make do with that. You’ll say, You know what? I’m fine, I’m going to do this. I’m going to be happy with my $55,000 Alan. I mean, thousands of you write with all shapes and sizes of portfolios, and we see people with millions of millions and millions of dollars in their miserable.
We see people that can live off a $55,000 of the happiest people that you’ve ever meet in your life. So money doesn’t necessarily mean everything. You just want to, you know, funnel this in to figure out what you can spend that gives you a little bit better peace of mind out versus saying, I need 2, 3, $4 million if they know I can spend 50, 60, 70, 80 grand. OK, that’s good. But for some people that spend a lot more, what can they do a lot?
Al: Yeah, exactly, Joe. And I think that’s right. We do see all kinds of people that spend at different levels. But if you’re in the situation where your spending is greater than what the example or what your situation would say you can spend. Here’s a few things you can think of. A lot of these are obvious, but we have 8 different things we want in one spot for you. So the first one is reduce your expenses. Take a look at what you’re spending right now. Figure out what you could potentially reduce to make this the budget. Maybe work out a little bit better. Another one for some of you that love your cars, maybe now it’s time to go down to a cheaper car, a lesser lease payment, whatever it may be getting a part time job. Maybe that’s a that’s a way to figure this out. Or maybe you set up a consulting business or an internet business, or Joe, maybe you walk dogs for whatever. I mean, there’s all kinds of things you could do to make a little extra income
Joe: Trade in your car for a cheaper car. That’s the show, right? That’s the main. That’s the main point. So you got to do. Trade in your car for a cheaper car. Few other things. Reverse mortgages so if you’re in your 60s and things like that and you have a lot of equity here in Southern California, a lot of you do. You might want to consider this or just downsize. Let’s get out of Southern California. Move somewhere a lot cheaper. Or, you know, stop supporting your older children. Allen wrote this. This is all Big Al Clopine. These are things for me to see because he’s looking to retire and he’s like, I’m getting rid of my lease because Robbie, you’re off the payroll, right? But there’s things right again, it’s just focusing a little bit more on your overall financial situation and you can make things work. But if you don’t plan, it’s very difficult to execute. So make sure that you put a plan in place so we can help you with that. Go to Your Money, Your Wealth. Click on our Retirement Readiness Guide. Retirement Readiness Guide. Go to Your Money, Your Wealth to our free gift to you to get you ready for retirement when it’s expected or when it’s not expected. We’ve got to take a break. We’ll be back in just a second.
Joe: Hey, welcome back to the show, show’s called Your Money, Your Wealth, Joe Anderson, Alan Clopine, answering your money questions, going through a pivoting in your overall financial life. Go to yourmoneyyourwealth.com and click on our special offer. It’s our retirement readiness guide. Our Retirement Readiness Guide. We’ve got Kendle Smith. He’s a CERTIFIED FINANCIAL PLANNER™. He’s going to help us help break down Social Security in just a second. But before we get to Kendle, let’s see how you did on the true false question.
Al: According to Fidelity Investments, the average couple of age 65 will need almost $300,000 to cover the cost of medical costs throughout retirement. Joe? True or false?
Joe: That is true, Alan. It is true. It’s a misleading number. It’s about $5,000 per year. Right. With a normal life expectancy per person.
Al: So $10,000 for a couple, you know, with co-pays and things like that. So if I say, Hey, your health, you know, your health coverage is going to cost you $5,000 a year or $10,000 per year versus $300,000, you know which one gets a little bit more news play, you know? Well, and I think it’s important to know what goes into that figure. So really, when you’re talking about the 300,000 or say, $10,000-$12,000 per year for a couple, something like that.
So it is your co-pays. It’s also cost of Medicare depending upon your income level. There’s different levels that you pay for Medicare and then supplemental insurance. So and drugs and things of that sort. So that’s what goes into those figures. What doesn’t go into those figures is long term care, so realize that would be something different.
Joe: Yeah. Well, let’s get into insurance so people are let go early or if they decide to retire early, you know, what are some considerations that we need to look at?
Al: Yeah. And I think it depends, Joe, whether the person is over 65 or under 65. So if you’re under 65, which you probably are if you’re retiring earlier than you thought. So take a look at your cobra. Take a look at your current health insurance policy, see what your and what you can do in terms of continuing that coverage. It’ll probably be more expensive than you think because your employer’s probably covering a bunch of that, maybe even all of that, but that’s one option. Another option is if your spouse is still working and has a plan, maybe you can get covered on his or her plan. That’s that can be a great way to go. Or if neither of those apply for you, then you can look at the insurance exchanges. Each state has an exchange that you can go to and figure out how to get your own personal health insurance.
Joe: Yeah, at 65, also, you are looking at Social Security strategies, or maybe as early as 62. Let’s bring in Kendle Smith to kind of break down Social Security options, Kendle. Welcome to the program.
Al: Thanks, Joe, and welcome, Kendle. How are you doing?
Kendle: Good. How are you?
Al: So Social Security, that’s an important decisions to be made for a lot of people. It’s it’s a lot of their income, in some cases, the majority, in some cases, all their income. But let’s talk about a few things you need to know about Social Security. First of all, how do you qualify? You need to work a certain amount of years.
Kendle: Yeah. So there’s a couple of ways to qualify. Main one, if you work at least 40 quarters, is what you have to earn, which basically equates to about 10 years worth of worth of income to qualify. Or you can be married to somebody who qualifies.
Al: Got it. And then so a quarter so. So 10, 10 years, 40 quarters. And then you can qualify. And then once you qualify, at what age is, can you start collecting?
Kendle: Yeah, you can take it as early as age. 62, it’s called an early retirement benefit. You can take it at your full retirement age, which is somewhere between 66 and 67 depending what year you were born. Or you could take delayed retirement credit at age 70. So it’s a really important decision for the decisions you make one time and then you’re kind of stuck with that the rest of your life. So it’s important.
Al: Well, an interesting I think some people when we say that, they think they have to take it at 62 or 66 or 70, you can actually take it at any point. Every month you wait, it becomes a higher benefit. So let’s go. We’re an example of someone that could collect their benefit, maybe at age 62 versus this year, 66 and two months all the way to age 70.
Kendle: If you take it early, it’s $1,500 per month. If they took out their full retirement age of 66 and two months, it’s $2,027. Or if you delay, you get an increased benefit of $2,640.
Al: So let’s chat about so who should be taking early? Who should be waiting? Yeah. So I think a lot of people do like to take it early because they’re like, Hey, it’s free money. I want to get it now. I want to use it. But that isn’t always the best long term strategy. And so in general, the longer you wait, the more you get out of the system over time. And so Social Security, the way I look at it, a lot of time, it’s like longevity insurance is that if you live too long, your your income is going to be higher. And I did talk to a lot of people. I think there are some good reasons to take it early. One is if you need the money down here and take it. Yeah, yeah. If you have to pay the mortgage, pay the rent, you have to take it. Another reason to take it early could be if there is a health issue. If you don’t have longevity, then it makes sense to take it earlier rather than later.
Kendle: And I guess a lot of people want to know the break even point. So would that be probably around 80 give or take something?
Al: Yeah, give or take. It’s around age 80 where, you know, regardless of when you take it, you end up with about the same. So, a lot of. Times, if you think there’s longevity, they’re going to live past age 80, it make sense to delay got it. So in some cases, your spouse maybe has a higher benefit than you. So let’s talk about the spousal benefit, how that works.
Kendle: Yeah, the way it works for a married couple is the with the lower earning spouse. They get the higher of their own or half of their spouses benefit. And so a lot of times, if there is a difference, a lot of sense, it makes sense for the higher earning spouse to wait as long as possible to get their benefit increase because of what happens eventually down the road of one spouse passes away. One of their Social Security benefits goes away, too.
Al: Yeah, so and that’s of course, the survivor benefit. And that’s a key consideration because in some cases, when people retire early, their tendency is to want to go ahead and take their Social Security. But if you have two spouses and one has a lower benefit, one has a higher maybe the one with the higher benefit, maybe you should push that out because that becomes the benefit for the survivor, whichever one survives. So I think that can be a great strategy. Interestingly enough, about a survivor benefit is it doesn’t have to be your own spouse or your most recent spouse. It could be a prior spouse. So how does that work?
Kendle: Yeah, So if you’re married to somebody for at least 10 years and there’s a divorce and you have not remarried, you can actually claim spousal benefits off of your ex spouse and they don’t even have to know about it.
Al: Yeah. And so sometimes when we tell people that then they get upset because they don’t want their spouse claiming the benefits on their earnings record. Now does that affect, you know, the the benefits of the of the spouse for the higher income expense?
Kendle: Yeah, it actually has no effect at all.
Al: Yeah. OK, so well, that’s good to know. All right. So if your spouse is collecting benefits on you, it doesn’t impact you or your family whatsoever. Exactly. Good. OK, well, that’s great. Now, in some cases, people worry about Social Security is going to be running out of money, supposedly in 2034. There’s probably some ways to fix that there. There have been ways to fix that. But one of the things that people have talked about is means testing. So why don’t you talk about that? And of course, no one’s really suggesting it at the moment, but it’s it’s a possibility.
Kendle: Yeah. So what means testing is basically it says that if you make too much money and you don’t necessarily need the Social Security, they can reduce your Social Security if you’re above certain income thresholds. So again, that’s something that that could help fix the funding funding of Social Security down the road. We don’t know when that’s going to happen, if it’s going to happen, what it’s going to look like.
Al: Thanks again, Kendle, for the information. And Joe, back to you.
Joe: Great stuff, guys. Really good stuff. Go to yourmoneyyourwealth.com Click on our retirement readiness guide. It talks all about taxes, Social Security, Medicare insurance, everything in between. Go to yourmoneyyourwealth.com. Get ready for retirement with our retirement readiness guide. Click on that special offer and it’s yours. Absolutely no cost. No obligation.
Joe: Welcome back to the program shows called Your Money, Your Wealth, go to our website, yourmoneyyourwealth.com. Click on that retirement readiness guide. It’s a gift to you. We’re talking about pivoting into early retirement. Some, as expected, some could not be expected. So you want to just make sure you’re prepared no matter where you’re at in life, to yourmoneyyourwealth.com. Click on that special offer. Let’s see how you did on the true past question.
Al: When forced into early retirement, you should always shift all of your investments to low risk options. Joe. True or false?
Joe: That’s false Alan. That would be false. I agree. But that’s what people do though, right? I’m getting into retirement. I’m approaching retirement. Or let’s say you got laid off. You see this volatile market. What is our instincts is like, you know, we got to flee right and get to safety. So you sell all your risky assets and you go into something very, very safe. Could that be the right answer? Absolutely. But you have to figure out what your target rate of return is that you need to get to accomplish your goals. So if that’s less than 1%, then yeah, just stay in cash, T-bills, you’re fine. But a lot of us need a certain amount of risk in the portfolio to make sure that you can have the money last for the next, you know, 20, 30 or some cases, 40 years.
Al: Yeah. And I think Joe and a lot of cases, people think I can’t take any more risk. I can’t afford to make the money back. But the truth is, if you’re if you’re forced to retire early, let’s say at age 60, you might live another 30 plus years. So you’re going to need some growth in most cases. But it’s also important when you have a life change, like not working to take a look at your allocation, you probably do need to make some changes. But it shouldn’t be all or nothing.
Joe: You have to take a look at where the money’s held. And we talk about this quite a bit on this shows in regards to taxes, right? But let’s put another spin on it. Let’s say if you’re under 59 and a half, if you are separated from service and you have dollars in this account, right? So let’s say you’re 56 years old and you get laid off and you’re like, You know what? I don’t want to go back to work. You have access to those dollars. Your 401(k), OK, not IRA dollars, but for one key dollars before 59 and a half if you separate from service from that employer at 55 or older. So just know there could be access there, but you’ll also want to look at this pool. This is your taxable pool, so this is always assessable. I think we so focus on this by 401Ks IRAs 403(b) TSP. Just keep jam and jam and jam and money into this thing. Right? But if you do that, just know that there’s rules and regulations to get the money out. 59 and a half in most cases is the golden rule. But if you’re 55 separate from service, you can have access to these dollars tax free dollars. We like these. So when you pull money out of those, it is 0% tax. However, you always have access to the contributions, so let’s say you’ve been putting dollars into your Roth IRA over the years. It is FIFO tax treatment, first in, first out. So let’s say you have $100,000 in your Roth IRA and $75,000 of it is contribution. You have access to that $75,000 any time. No taxes. No penalties whatsoever. OK. So again, looking at diversification of how you hold your wealth is so important not only for when you retire, let’s say normally, if that’s even a word anymore to give you diversification on your income. But how would it be up to pivot? You have to retire a little bit early. OK, where are you going to pull the dollars from and not get jammed up with huge tax liability and penalties and so on and so forth? So just understanding the rules now, I think, is key.
Al: Well, I think so, too, Joe. And then it’s also understanding where the tax brackets are because when you have tax brackets, I mean, there’s a 10% bracket, 12%, 22, 24 and so forth. But if you can arrange your affairs, so let’s just say stay in the 12% bracket. So just a quick little example. Let’s say you’re single, right? And you can see the top of the 12% bracket is about $40,000, OK? And there’s a standard deduction of about $12,000 roughly. OK, so that means you can probably pull out about for about $53,000 from your IRA or for one K and still stay in that lowest bracket. Well, if you need more than that, maybe the rest comes from your non retirement accounts, your Roth accounts, but you want to think about where you’re pulling that money out of to stay in lower brackets. For some of you, it’s staying in the 22 or 24% bracket. Others, it may be higher, but if you think about that, you’ll end up using a lot less tax dollars for tax, which will allow you to live a better life.
Joe: Right. And if you look right, we have a 10%, 12, 22, 24y to 35 and 37. So you need to really understand what tax bracket that you’re in in, especially when you’re in retirement. We always assume I’ll be in a lot lower tax bracket, and that might be the case.
But how about a zero% tax bracket, one that be cool? Right? So if I’m understanding or maybe the 10%, if I’m single, it’s ten thousand. If I’m single for the top of the 12, it’s 40 or just double that 20 and 80. So look at your tax return. And then look at these brackets, it have a game plan of what assets are you going to be pulling from if I’m pulling from here? Like Al said, it’s not going to cost me anything. It’s tax free. If it’s taken from here, it’s a capital gains. But if I’m if I’m in the 12% tax bracket, guess what? It’s tax free. Understanding distribution taxes the tax brackets is really key to have a really cohesive strategy. So let’s kind of pivot here since we’re talking about pivot financially. Al, let’s go to ask the experts.
Al: This is from Scott in Carlsbad. My company is offering me a severance package if I take the lump sum. It will bump me into the 35% tax bracket. Is it better to take a series of payments to stay in the lower bracket or take the lump sum and invest the money? Scott, that’s a great question, and it somewhat depends upon what your company is going to allow. Some companies require that you take that lump sum. Some may allow you to take a series of payments over a year, maybe even a couple of years. I think maybe to me, the most important thing is if you have the ability to take some of it in one tax year and the rest in another tax year, that could be a way to end up paying less in tax.
Joe: Yeah, that’s on negotiation with the employer. It is. It is because they don’t all want to do that right now. They want to get it off the books and get it back. And then it’s a tax deduction for the employer. Yeah, you bet, right? And so if you do another thing that you might want to look at if you haven’t fully funded a 401(k) plan, you can take some of that severance improbably fund the 401(k) to get it pre-tax so you that could save you, maybe push you down in a little bit lower bracket. So, yeah, there’s not a lot that you can potentially do. That’s just a lot of ordinary income getting thrown at you. So next question, please.
Al: Jennifer, from Vista, I was forced to retire early to take care of my spouse. I never thought too much about my investments should I be making any changes? Jennifer, the answer is maybe when you have a life changes, you want to relook at your allocation to see if it still makes sense.
Joe: Yeah, without question, you probably need to make some changes there if one spouse is no longer working. If there’s health issues, you probably have health and, you know, health coverage costs. So, yeah, this is a really good time to stop pivot. Figure out what you’re doing, right? Write some things down and then get a good financial strategy in place. OK. What did we learn today, folks? Well, we got to understand how much money that you can spend. There’s multiple ways to do the calculation. It’s the 4% rule. You can look at all right, how much money do I have? Multiply it by 4% and then add in your other fixed income sources. And then that is your income health insurance. As we age, we don’t get healthier. Unfortunately, I wish we could turn that around, but we will have health issues, so you want to make sure that you have the appropriate coverage in place. Social Security Kendle Smith, CERTIFIED FINANCIAL PLANNER™. Kind of walk through that. Do you have a Social Security in place? If you do it wrong, it could cost you tens, if not hundreds of thousands of dollars that you’re putting on the table. And then taxes, of course, do the things that you can control, right? And taxes is one of them as long as you understand how the tax system works. And then to put this together for our gift to you is go to Your Money, Your Wealth. Click on our special offer. It’s our retirement readiness guide. Are you ready for retirement? You’ll find out if you like it or not, right? Go to yourmoneyyourwealth.com. Click on that retirement readiness guide. It’s our gift to you. That’s it for us today. Appreciate you hanging out for Big Al Clopine and Joe Anderson, you just watched another episode of YMYW or Your Money, Your Wealth. Have a great weekend, everyone.
