Even if you’ve done a great job saving your entire working life, there are “Wealth Busters” that can destroy your financial plan for retirement. Certainly, missteps and mistakes are going to happen as you make your way toward retirement, but just knowing what the wealth busters are can help you avoid them. Joe Anderson, CFP®, and Big Al Clopine, CPA are here today to bust it wide open!
Wealth Busters:
- Funding Adult Children
- Tapping Retirement Funds Early
- No Withdrawal Strategy
- Market Performance & Inflation
Important Points:
- 0:00 – Intro
- 2:10 – Wealth Busters
- 3:18 – Funding Adult Children: Sacrifices Parents are Willing to Make
- 4:52 – Funding Adult Children: Loss of Compounding Effect
- 6:12 – Download: Wealth Busters to Avoid Guide
- 7:17 – True/False: When withdrawing money penalty free from a Roth IRA (before 59 ½) doesn’t mean the withdrawals are tax free
- 8:50 – Tapping Retirement Funds: Real Costs
- 10:56 – Tapping into Retirement Funds: Lost Opportunity Costs
- 11:39 – No Withdrawal Strategy: Rule of Thumb
- 13:50 – Wealth Busters: Worst Withdrawal Strategy
- 15:45 – Download: Wealth Busters to Avoid Guide
- 13:55 – True/False: One dollar today is worth half as much in terms of purchasing power as the same dollar two decades ago.
- 17:04 – Inflation & Poor Market Performance: Sequencing Risks
- 18:14 – Poor Market Performance: Recovery
- 20:00 – Ask the Experts: My husband and I retired almost a year ago based on our situation at the time. Since then the market downturn has dramatically impacted our investment accounts and inflation is busting our budget. The projections now say we’ll likely run out of money much earlier than expected. What can we do?
- 21:12 – Pure Takeaway
- 22:00 – Download: Wealth Busters to Avoid Guide
Transcript:
Joe: Hey, you worked your entire working life. You’re ready to retire, and–guess what–boom, something blows up. There’s a lot of things that can bust your wealth. You know what they are? Stick around, folks. The show is called Your Money, Your Wealth®. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, president of Pure Financial Advisors. I’m with my partner. That’s Alan Clopine. He’s a CPA, and we’re gonna help you not bust your retirement. Who you gonna call? It’s the wealth busters. I got paid to do that. When you look at starting your overall financial plan, your retirement plan, let’s talk about top regrets. First, not have an emergency fund. Why is that a top regret? Because it puts people in debt. If you don’t have a cash reserve, something happens, you have to go to credit cards. You have to go to the home equity line of credit. You have to go to Mom and Dad, brother, sister, and uncles to get that loan. Number two is probably the biggest here, right, is not saving enough for retirement, so we want to build some cash. We want to stay out of debt, and we want to make sure that we’re saving appropriately for your retirement so we can get rid of these wealth busters. That’s today’s financial focus. 10%– Now, this is just leaving money on the table, folks. 10% of people who qualify for a match on their 401(k) do not contribute. It’s free money. I think, Alan, we saw a study here that had billions of dollars that were left on the table of free, you know, retirement cash that people are not necessarily taking advantage of.
Al: Well, that’s right. I mean, one in 10 are not doing any contribution, but if you figure out the people that are not maxing out, right, their 401(k) or at least maxing out to get their match, then it’s, like, the majority, so let’s talk about wealth busters today. What are they? What are things that can bust your wealth? Well, first of all, funding your adult children, right? This happens to many, many people, and we would tell you, try not to do it, or if you do it, try to do it in just little ways, not big ways. Second is tapping into your retirement funds too early, happens to a lot of people. That can really bust your future retirement, bust your wealth. Another one is no withdrawal strategies, right– not knowing how much to take out, too much, too little, how this work–and finally, market performance. Sometimes market doesn’t perform how you want to. Plus, there’s inflation, Joe, so there’s a lot of factors. You know, you’ve done a great job saving, and you got a plan, but some of these things can kind of mess it up.
Joe: Yeah, right? All best laid out plans, something usually comes in the way, right, and creates this little bit of a detour. Let’s kind of jump into the first one–sacrificing your retirement to take care of your kids. I get this–I do–now have children, Big Al.
Al: You finally get it, right? Ha ha ha!
Joe: Not to some extremes here but look at this. 34% of people are gonna say, “You know what? I would like to live a more frugal lifestyle.” All right, but here, 25% of parents are pulling money out of their retirement accounts to help their adult children. 22% said, “You know what? I’m gonna keep on working. I’m gonna get that paycheck. I know I could retire today, but I still have to fund the kids, so I’m gonna push that retirement out,” or they’re gonna take out debt to help them, right, so a lot of these I get. There’s an emotional attachment towards your kids, and if they need help–God bless it–help them, but you got to take care of number one first, right, making sure that your financial house is in order before you start looking here.
Al: Yeah. Pulling money out of retirement savings or debt, this is a really common one, and I get it. Your kids want to go to college, right, and you want to help pay for it, or you want to pay for it completely, or maybe you went to college and didn’t get any help and you don’t want to be that kind of parent. You want to help your kids, but if it’s gonna affect your retirement–which in most cases, in many cases, the answer is yes–be careful how much you’re spending on this. There is student loans. There’s other ways for this to happen. The kids could work part time, right, whatever, but, yeah, don’t get too far into debt or pull too much out of retirement.
Joe: Right. You can’t take a retirement loan, you know. You can take a student loan, but you can’t necessarily take a retirement loan. You can’t have a loan for your own retirement. Look at this interesting study. 23% of parents, right, they’re giving $600 roughly a month to their adult children while they’re putting $490 away for retirement on average, right? They’re giving more to their kids than they’re putting to themselves, so if we extrapolated this, Big Al, that $605 per month over 10 years at a 6% rate of return, well, you just gave your kids $100,000. Over 20 years, it’s almost 300 grand.
Al: Right, and when you think about 30 years, right, it’s a lot of money.
Joe: It’s probably double that.
Al: It’s more than double that, right? Yeah, exactly, so this is– and, again, we get it. I’ve got two kids. I have two adult children. I understand what this is all about. I did pay for their college, right? I get it. I get it. Nevertheless, if it’s gonna impact your retirement–in most cases, it is–just be careful about it.
Joe: Hey, look at this. 31% of parents that are currently retired are still taking care of their adult children, right? Kick them out of the basement already, right? You got 50% of people 10 years from retirement, so this is, like, the red zone. You’re so close to retirement, your focus should be on saving that nest egg. 50% of you are still funding your adult children. We’re not saying minor children, adult children, right? 11 to 20 years from retirement, almost 70% of parents are still taking care of their kids. If you need help with this, you know where to go. Go to yourmoneyyourwealth.com. Don’t let these wealth busters get in your way. Have a financial strategy to make sure that you are looking out for these busters so you could still have the retirement of your dreams. Yourmoneyyourwealth.com, click on that special offer. It is our “Wealth Busters to Avoid Guide,” wealth busters to avoid. Go to yourmoneyyourwealth.com. Click on the special offer. It’s a nice white paper, right? You can download it right there at your computer, have a nice, little read. It’s only available for two weeks, folks. Get rid of these little busters out there. We got to take a break. The show is called Your Money, Your Wealth®.
Joe: Hey, welcome back to the program. The show is called Your Money, Your Wealth®. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, Alan Clopine, CPA. We’re helping you get rid of those darn little retirement busters, wealth busters. If you need the guide to get rid of the busters, go to yourmoneyyourwealth.com. Click on the special offer, right? This guide is so good, we’re only gonna have it on the website for two weeks. Go to yourmoneyyourwealth.com. Click on that special offer because I don’t know if I can say “buster” again after this show, Al.
Al: That’d be tough.
Joe: Ha ha! Let’s see how you did on the true/false question.
Al: True or false? Well, that’s true. In other words, if you do qualify and take money out of an IRA without penalty before 59 1/2, there are a few exceptions. Well, great. You avoid the 10% penalty, but you still got to pay tax on the money coming out of the IRA, so don’t forget about that.
Joe: Yeah. There’s some exceptions when we’re looking at IRAs, retirement, right, so once you reach that 59 1/2, when you take the money out, there’s no 10% penalty. You do have to pay the tax on a regular IRA. It’s tax-free if it was a Roth IRA. If you would like to have money for education, Al, we’re talking about taking money out of retirement accounts. Hopefully, you don’t cash it out, but if you do, there’s some exceptions here, as well.
Al: Well, you can, and I lot of people do that for their kids’ educations, which is what we said. Try not to do that, right, because if you do it, you’re taking from your own retirement. It’s gonna impact your golden years where you’ve been working and saving for.
Joe: If you do take money for education out of a Roth IRA, you would be able to take money from the contributions tax-free because that’s basis, but any dollars that come out would be taxable, but there are some exceptions here–first-time homebuyer.
Al: Yeah, so 10,000 bucks first-time home. When you don’t own a home and you buy a home, first $10,000 for the down payment, again, it’s penalty-free, but it’s not tax-free. You still have to pay taxes on it, and then reimbursement for adoption expenses would be another exception.
Joe: So let’s say you take money out of the old retirement account, right? You want that $100,000. You want to buy a new boat. You want to take care of the kids, whatever the case may be, right, just understand if you’re under 59 1/2 what the real costs are, what the opportunity cost is, as well, so you have your $100,000, right? In most cases, you’re gonna net 60 grand or less, depending on what state you live in, right, because there’s gonna be potential state and local taxes that you have to pay, right, so, depending on what state that you live in, you have to pay state tax, and some states actually have a penalty, as well. Then you have your federal penalty of 10%, right? Then you have to pay federal taxes, and then you net here. In this simple example, $100,000, let’s just assume you have some state and local taxes of 8,000 plus your 10% penalty on the 100,000, which is 10, plus federal taxes, which is 20. You net 60, right? This is generous.
Al: That’s very generous because there’s actually no such thing as a 20% federal bracket. Most people are in 22%, 24%, or higher, right, so what we’ve seen in many cases is, people keep 50 cents on a dollar or 55 cents, 60 cent maybe, right? 62 cents is generous, really, so realize that with the $100,000 that you pull out, it is not all yours. A bunch of it goes to the government.
Joe: Yeah. Just think about this in general with retirement accounts, right? It’s not all your money. You might look at the statement, it says $100,000 in it, right, but you don’t have $100,000. You have something substantially less. In this example, it’s 60,000, right. Let’s say you take away the 10% penalty. You still don’t have the full $100,000. You have 70 grand. 30% of that is going to the IRS. However, if you did take the money out, pay your local taxes. You pay your state taxes. You paid the penalties and everything else and federal taxes, what did that really cost you in opportunity, right? You wanted that 100,000 or your net 60,000 to buy the new car. What did the car actually cost you? Well, if you invested that $100,000 and let it continue to grow at 6% over 30 years, it’s almost 600 grand, so 60,000 versus almost 600, right? It’s a $500,000 delta here, so just think about the decisions that you’re making and the long-term effects that is has on you and your retirement.
Al: Yeah. I think that’s exactly right, a perfect example, so you take $100,000 out to buy a car, that nice car you wanted, right, but then you only get to keep about 60,000, so you’re still short, but you cost yourself about 600,000 in retirement based upon a 30-year 6%. Some of you can earn more, you know, so just be aware of that.
Joe: Let’s talk about sustainable distribution rates, so another buster in retirement is not knowing how much money that you can take out, so we talked about, “Hey, we have adult children that we have to, you know, fork out cash for.” We talked about, hey, you know, taking your dollars from your retirement early, paying the penalties and taxes. What is that costing you, or how does that blow up your retirement? Another is not really understanding how much money that you can take from the portfolio because let’s say the market does 6%. Some people say, “Well, I’m gonna take 6% out, and just, I’m not gonna touch any of the principal.” Be careful with that because it depends on your age. There this withdrawal rate that you want. It’s a guideline, right? From age 50 to 60, it’s roughly 3%. You don’t want to pull out any more than 3%. I would say from 50 almost to 70, I wouldn’t pull out any more than 3 1/2%, but if you’re in your 50s, you want to retire early, no more than 3, maybe even closer to 2 1/2 if you want to be conservative, 3 1/2 from 60 to 65, and then here’s that 4% rule that everyone’s pretty much familiar with.
Al: Yeah, and I think that’s right, that 4%. You do hear about this, and that came about years ago looking at a couple that’s aged 65 and what’s the likelihood they’re not gonna run out of money, and the 4% distribution is what they came up with, doesn’t mean it’s guaranteed. It’s just a high likelihood of making it, at least based upon historical returns, but be aware. Now, if you’re older, you can take a little bit more, but if you’re younger, you want to take less just because you’re gonna have more years withdrawing the money out, and I think it’s important to re-emphasize, market earns 10%, you can’t pull out 10% because what happens next year if the market loses 10%? Are you gonna put 10% back in? No. You’re gonna take money out again, so that’s why you don’t necessarily take what the market gives you, because you have down years, as well.
Joe: Yeah, so a quick example–million dollars. 4% of a million dollars is $40,000, so if I’m 65, between 69, and I have a million dollars saved for my retirement, you don’t want to pull out any more than $40,000 a year, right? Doesn’t seem like a ton of money. A million seems huge. 40,000, you’re thinking, “Wow. I thought I could at least pull, you know, 100 grand.” You just follow these guidelines, right? Another is how you’re going to pull the dollars out. There’s a lot of different advice out there. In my opinion, most of it’s flawed. This is one of the number-ones, is not withdrawing from investment accounts first, right, so this is what a lot of advisors are saying, “Hey, invest–” or not invest– “Pull money from your taxable account first. Let your tax-deferred continue to defer. Don’t touch that money until you absolutely need it,” right, so this says, “Withdrawing money from 401(k) before RMDs are required.” Both of these are wrong. You don’t want to do this. Let’s bust this wide open. You want to have a strategy that is tax-diversified because if I just take money from my taxable account, right, I’m in a very low tax bracket. I’m in a capital-gains environment, and I’m missing out on these low tax brackets where I could be pulling money from a retirement account and at least fill up those brackets or do Roth conversions and having money grow tax-free, so having a distribution strategy that’s focused on tax is one of the biggest wealth busters out there.
Al: Yeah, and I think–well said–that this is a very common problem that people have, is they hear once they retire, “Just take out of your nonqualified nonretirement account. Keep your taxes low,” and I get it. That sounds great, but what have you done? You basically let your deferred accounts, your IRA grow, grow, grow. Your required minimum distribution is gonna be higher, and when you have to take it, you’ll also be taking Social Security, and you also didn’t take advantage of these lower brackets when you could’ve pulled money out of the 401(k), or, even better yet, you could’ve done Roth conversions, utilize these lower brackets so later on, you’ve got less of a required minimum distribution.
Joe: A lot of busters out there that’s busting your wealth. Go to our website yourmoneyyourwealth.com. Click on that special offer. It’s only available for two weeks, folks. Yourmoneyyourwealth.com, click on that special offer. It’s avoiding the wealth busters that are out there. It’s our treat to you. Go to the website. Check it out. We’ll be back in just a second.
Joe: Hey, welcome back, folks. The show is called Your Money, Your Wealth®. Joe Anderson, Big Al. We’re talking about busting your wealth wide open or helping you avoid the wealth busters that are out there. Let’s see how you did on the true/false question.
Al: I would say that’s true, Joe. That sounds like that’s right.
Joe: What do we got? 2022 $1.00, 2042, it’s gonna be worth 55 cents.
Al: Well, OK, so that’s about right. Now, that’s going forward, not backwards, but same idea, right?
Joe: I guess so. Ha ha! That’s the effects of inflation, so 3% inflation over 20 years, yeah. I mean, what did we experience this year?
Al: Well, it was probably– depends on who you talk to–7, 8, 9.
Joe: So inflation, that could bust your wealth, right, when you least expect it. All right. Let’s talk about sequence of return risk because I think this is a pretty important topic in regards to your withdrawal strategy. We’ve seen a downturn in the overall markets this year, and if you started your retirement and you had 100% equity portfolio and said, “You know what? I’m gonna start taking dollars from the overall portfolio,” you got to be careful there, right, because, given this example, let’s say you have $500,000, you had a 19% loss, right? With inflation at 3 1/2%, an early loss, right, early in your retirement because now that $500,000 is significantly less that you’re pulling dollars from, it can take 10 years off of that portfolio.
Al: Well, that’s exactly right, and so the way to not have this happen to you is, you don’t want 100% equities when you’re going into retirement. You want to have some safe money. Let the market do what it’s gonna do. If the market goes down, if stocks go down, you want to take the money that you need for living out of your safe money that’s not really going down, hopefully even going up a little bit. That way, you let your market dollars, your stock-market dollars, go back up, and then you preserve your strategy. 100% equities, if it goes down and you’re taking money out at the same time, you’re in a bit of trouble.
Joe: Look at this, Al. OK. You have 250,000 bucks, OK?
Al: Sure.
Joe: We’re gonna have a countdown to retirement. First year, 12% out of your 5-year countdown, that’s pretty good.
Al: I’m thinking I’m gonna retire in 4 years then because why not?
Joe: Next year, you’re up 10, so now you have about $300,000 sitting in the old kitty, OK. Boom, down 19, down 15. Now you want to retire. What rate of return do you think you need just to get your principal starting back?
Al: Yeah. You would think down 19, down 15, that’s 34%, so probably about 34% market increase to get back.
Joe: Right. Some people think if you’re down 10%, you need 10% rate of return, you should be fine, right, or if I’m down 20 and so on, so you’re down 34%, you need almost a 50% rate of return just to get your money back, 45%.
Al: That’s because people don’t realize the percentage is based upon your starting percentage, right, so if you’re starting at a lower percentage– a lower dollar amount, you need a higher-percentage gain to get back to where you were.
Joe: Right, because if you have $100,000 and you lose 10%, what do you have? You have 90,000, OK, so now you gain 10% on the 90,000, you don’t have $100,000, do you, right, because 10% of 90,000 is 9 grand, so you’re still short of your principal dollar, so you need almost–a lot more return on the upside just to get you back to square one, so in this example, you would need two years of a 21% rate of return compounded annual, 3 years of 13%, so that’s why we’re having dips right before your retire can be devastating to the overall retirement. All right, enough of the busters. Let’s switch gears. Let’s go to “Ask the Experts.”
Al: This is from Steve. Boy, Steve, that’s the million-dollar question everyone’s thinking right now, so one of the things we’ve talked about was, if you had a strategy where it was not 100% equities, you have some safe money that you can pull out of that, let the equities, stock market grow back, you’d probably be OK, but let’s say that’s not what you did. Now you’re gonna have to regroup a little bit. You’re gonna have to cut your spending. You’re gonna think about working part time for a while. There are downsides. These are all horrible things, but that’s the reality of what some people are facing.
Joe: Right. You have to have a plan today, right? You know, people that had a plan couple of years ago, you have to work this stuff in your plan– what if, what if this, what if that, right? What is the strategy if the market drops 20%? What’s the strategy if the market drops 30%, 40%? Do you have to go back to work? Do you have to cut your spending, or do you have a safe pool of money over the next 3 to 5 years that you can pull from–cash, CDs, or something very safe–to let your overall portfolio recover? All right. What’d we learn? A lot of busters out there that’s busting your wealth–one, you’re still funding your kids’ lifestyle, their adult kids’ lifestyle, so you’re taking money out of your retirement accounts, taking out debt, retiring later, right, just to continue to help out the kids; pulling out of monies from your retirement accounts early, paying the taxes, paying the penalties and everything else. Third was not having a withdrawal strategy, making sure that, “Hey, how much money can I be pulling out from my different accounts, and where should I be pulling the money out to mitigate my taxes long term?” and then market performance and inflation can absolutely derail you. Don’t let these wealth busters get in your way. Have a financial strategy to make sure that you are looking out for these busters so you could still have the retirement of your dreams. Yourmoneyyourwealth.com, click on that special offer. It is our “Wealth Busters to Avoid Guide,” wealth buster to avoid. Go to yourmoneyyourwealth.com. Click on the special offer. It’s a nice white paper. It’s only available for two weeks, folks. Yourmoneyyourwealth.com, click on that special offer. It’s avoiding the wealth busters that are out there. For Big Al Clopine, I’m Joe Anderson, and we will see you next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
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• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
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• 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.
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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.
