Looking forward to retiring, but not sure how close you are to achieving financial freedom? Retiring too early can leave you financially strapped or even feeling unfulfilled. Retiring without a plan in place for how you will withdraw the money you have saved or a plan to help you minimize your tax exposure, can dramatically limit how far your funds will go. Financial professionals Joe Anderson and Alan Clopine guide you through the key steps you can take to get closer to financial freedom. Regardless of where you are in meeting your financial goals, the duo will help you improve your retirement readiness by giving you the key tools and strategies to implement.
(01:10) – How Much Money Have Americans Saved for Their Retirement
(01:50) – Key Questions to Ask Before your Retire
- Can I afford to retire?
- When should I collect my Social Security benefits?
- What will I do with my time?
- How can I minimize taxes in retirement?
(02:31) – Can I afford to retire?
(05:06) – Calculating Your Current Spending
(07:40) – Key Options to Improve Your Retirement Readiness
- Reduce spending
- Work part-time or side gig
- Downsize your home
- Reverse mortgage
- Rent a room in your home
(10:30) –Key Considerations for Social Security
- Claiming late is often (but not always) beneficial
- Claim early when you need to cash flow
- Spousal & Survivors benefits are available for couples
(14:00) – Keys To Reducing Taxes in Retirement
- Donor-Advised Fund
- Qualified Charitable Distribution
- Tax Loss Harvesting
- Roth Conversion in Low Tax Years
(18:58) – Tax Brackets
(20:25) – Ask The Experts
(25:17) –Key Questions To Answer Before Your Retire
- Can I afford to retire?
- When should I collect my Social Security benefits?
- What will I do with my time?
- How can I minimize taxes in retirement?
Joe: We spend our entire adult lives saving for retirement. Well, most of us do. And then you get to this magical point of 65 and say, “Am I ready to take the plunge?” Are you ready? Do you have the appropriate keys to get you to a successful retirement? Stick around, folks. We will fill you in. Welcome everyone. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors. And of course, I’m with the big man sitting right over there, Big Al Clopine.
Al: Good morning, sir. How are you doing?
Joe: I’m doing fantastic.
Al: Good, same.
Joe: We’re talking about getting you the appropriate keys for a successful retirement. Are you ready for retirement? When you take a look at most people, they have a dream of getting somewhere in retirement. But do they have the roadmap? Are they ready? Are they financially ready? Are they emotionally ready? That’s today’s financial focus. We’re going to help you find your financial freedom, because here’s the issue. Look at this savings rate. 46% of people don’t have any savings at all. Less than $10,000: 19% of the population. $10,000 to $50,000: that’s 12%. So about 80% have less than $50,000. 20% of the one’s probably watching the show, but it’s kind of scary out there. A lot of times we’re not necessarily prepared for retirement, so let’s get prepared right now. Let’s bring in the big man, Big Al Clopine.
Al: So there really are a few key questions you need to ask yourself to make sure that you’re actually ready for retirement, and I think number 1 is can I afford retirement? We’re going to look at a few numbers just to give you some simple math to figure this out. Number 2 is when should I collect Social Security? That’s a key decision for almost everybody. A 3rd one is, what am I going to do with my time? And this is actually more important than you might think. Our show, we talk a lot about finances, but equally as important is what are you going to do? How are you going to fill your time? What’s going to give you passion? And then lastly, we always like to talk about taxes. Saving taxes, because if you can save taxes in retirement, you can stretch those dollars. You can do more of the things that you want to do. So, Joe, this particular show, I think we’re going to touch on almost everything that you need to know. The keys to successful retirement.
Joe: Absolutely. First thing’s first, I think this is a really good exercise that I want all of you to do. Very simple to do. First off, you want to take a look at your fixed income. How much money do you have in Social Security or pensions? That’s a pretty simple calculation. You look at your Social Security statement, and if you have a pension, you take a look at your pension statement. Get a rough estimate. So this individual, they’re doing some planning. We’re going to receive $32,000 from Social Security, another $10,000 from my pension. Alan, the 4% rule. We talk about the 4% rule quite a bit, but it’s like we’re using the inverse. This is, I think, a better way or easier way for a lot of people to take a look at it. Explain the 4% rule.
Al: Well, I think so, too, Joe, because the 4% rule, it’s just a starting point. You may want to do a little bit more planning, but this will at least tell you if you’re in the ballpark. So the 4% rule basically came about probably 30 years plus ago, where it was something like 90- 95% probability that you have a successful retirement if you only spend 4% of your portfolio over a 25 year period. That’s where this came from. So if we do it the other way, it’s like, “Well, what can I spend?” And in this example, it’s $700,000 at 4%. So now it’s $28,000. Now we can add these 3 things together, Joe, between the $32,000, the $10,000, and the $28,000, I can probably spend about $70,000 in retirement.
Joe: So we’re looking at what is your ability to spend versus not necessarily what your goals are to spend. Because if I want to spend $100,000, it’d be a little bit different calculation. But this is really quick and easy. You’re going to take a look at your Social Security, your pensions. We already discussed that. Then the second thing is that you add up all of your assets. What do you have in IRAs, 401(k)s, 403(b), TSP, cash, brokerage accounts, whatever. Just add all of those up and then just multiply it by 4%. In this scenario, this couple has $700,000 of investments saved. You take 4% of that, so they don’t want to spend any more than $28,000 each year from the $700,000. So then I take this plus this plus this equals $70,000. That is their spending. That’s their paycheck. If they spend more, sure, they can spend more, but they are in jeopardy of running out of money. If they’re very conservative in saying, “Hey, we could spend $70,000, that’s great. But we’re only spending $60,000.” Now, they’re on track. It feels pretty good. There’s a little bit of a cushion. So when we look at how do you know how much you’re spending? This is the biggest issue because most people have no clue.
Al: Yeah, because no one wants to do a budget. Myself included, even though I probably should as a CPA. But if you don’t do a formal budget, and I would say talking to a lot of you, maybe 1 in 20, if that, actually have any kind of budget. Maybe 1 in 50. But if you’re like the rest of us, it’s like, “Well, how much am I spending? How can I get a rough approximation?” And here’s an idea. Take a look at your net pay from your paychecks and in this example, it’s $5,000 per month. So that’s after 401(k), that’s after taxes. That’s the net. That’s what I have. And then if you figure that out of that $5,000, I don’t really save anymore and I’m not really spending anymore because my credit card balances aren’t going up. So if that’s the case, then probably $5,000 a month is what I’m spending, approximately. Multiply that by 12 months, and in this example, it’s $60,000. And you take that $60,000, compare it to what we just did, and like you said, that looks pretty good. Now, we haven’t included taxes. This is a simplification, but it gives you an idea. In some cases it’s the reverse. We see people can spend $70,000, but they’re already spending $80,000, or $90,000, or $100,000.
Joe: Exactly. So this is just a quick, simple exercise to get you on track. This is a simple key to make sure that you’re going through the right door when you hit retirement. Because in this example, I did a little bit of math and a little bit of calculation. You don’t need some huge spreadsheet, some complex financial planning. This is really good here. Start here. Most people don’t do this at all. And then it’s like, now I know what I can spend, what am I actually spending? Hey, we’re golden. But if this number is like $100,000 and I can only spend $70,000, you’ve got some work to do. So Al, what can people do?
Al: Well, it kind of gets back to reducing spending or increasing income. It’s not that complicated, but here’s a couple of ideas. When you’re thinking about reducing spending, take a look at some of your expenses, what you’re spending month in, month out and what are some things that you can potentially reduce to get you to the point where you can actually retire? Or maybe increase income. Maybe you’ve got some kind of profession where you can continue consulting or something like that, or a side gig. Now with Uber and things like that, there’s a lot more that you can do to make a little bit more income. Maybe you think about downsizing your home. In some cases, reverse mortgage, they’re a little bit better than they used to be. That can be a way to reduce your expenses. Or Joe, you’ve got a home with a bunch of rooms. You can rent a room.
Joe: Sure, rent a room. Sell your nice car. Wasn’t that one of your little…?
Al: Yeah, you didn’t like that one. So I took that one off.
Joe: Yeah, come on in. I’m renting. If you’re a little short, you can live with me, or I might have to live with you. We want you to be prepared. We want you to find the appropriate keys for your retirement. If I have a key, it’s not going to work for Alan’s retirement. You’ve got to find your own key for your own retirement. Our special gift today is our retirement readiness guide. Are you ready? Are you understanding all the facets or all the keys, if you will, for successful retirement? Go to yourmoneyyourwealth.com, click on the special offer this week. It’s our retirement readiness guide. Yourmoneyyourwealth.com. Going to take a break. We’ll be back in just a second. Show’s called Your Money, Your Wealth®.
Joe: Hey, welcome back to the show, it’s called Your Money, Your Wealth®. Joe Anderson here alongside Big Al Clopine. We’re talking about the keys to a successful retirement. Before we get into more keys, let’s see how you did on the true/false question.
Al: “When I am estimating my expenses during retirement, my tax bracket will always be lower in my retirement years than my working years.” Joe, true or false?
Joe: I think most people think it’s true.
Al: Yeah, often it is.
Joe: Most times. Because we looked at the savings rate, most people are not necessarily saving. They don’t have a ton of assets. But, it’s false, because there’s the other side where people have substantial assets and a lot of those individuals might be even in a higher tax bracket.
Al: And I think it’s a surprise to a lot of people because when you’ve got a lot of money in your IRA, or your 401(k), or your 403(b), or any combination, and then you have a pension as well, and maybe you’ve got Social Security, it’s like, wow, you start adding these things up and your income could actually be higher. In some cases, quite a bit higher. So, Joe, I think that’s where people are surprised sometimes because everyone assumes they’ll be in a lower bracket.
And that’s true in many cases, but not always.
Joe: With people that do a little bit of planning, they’ll find out exactly what type of tax bracket that they’re going to be in. And I think that’s key given the fact that, how much money do you want to spend and where’s that income going to come from? So looking at Social Security, for instance, what is your strategy there to make sure that you have a fixed income floor to make sure that you can provide for yourself? Now, Social Security there’s what? 527 different combinations that you can claim your benefit?
Al: Because you can do all kinds of stuff between spousal, between survivor, you can claim month in/month out, but there’s a few key ages that you need to know. So let’s start with age 60. That’s the earliest age you can claim survivor benefits. So that’s one thing to know. Now, for yourself on your own benefits, it would be age 62. That’s the earliest age that you can claim. For all of us now, our full retirement age is 66 or 67 or somewhere in between, depending upon your birthday. And finally, age 70 is the latest that you can collect. And interestingly enough, the sooner you collect, the lower your benefit. The later you collect, the higher your benefit.
Joe: Yeah, I mean, this is key. No pun intended there.
Al: I think there was.
Joe: I think there was, too. There’s a lot of keys going on. You have to really pay attention to this because this could put significantly more dollars into the overall household nest egg at the end of the day. Most people still claim their benefit as soon as they can get it, 62. But just realize, depending on what your full retirement age is, you’re going to receive a significant haircut on that benefit for life. So you have to look at: Are you married? Are you single? What other income sources are there going to be? Really take a deeper dive into the Social Security claiming.
Al: Yeah, no question. And so it’s a little bit tricky right now, Joe, because the full retirement age keeps changing until we get to 67. But, what we do know is that if you claim it at 62, you’re going to have somewhere between 25% and 33% percent benefit. And if you wait till age 70, you’ll receive a much higher benefit. Everything is relative to your full retirement age. But realize this. If you are younger than full retirement age and you’re still working, and you’re trying to claim Social Security benefits, the Social Security Administration says, “Not so fast”. You’ve got to make a little bit less than $18,000 to claim your full benefits. Otherwise, you have to give some of it back.
Joe: I think that’s a really good point is that they’ll claim it at 62, but they’re still working. And then they’re, “Hey, well, where’s my benefit? I was going to try to double dip here”. The Social Security Administration’s like, no. If you make, like Al said, $20,000, if you make more than that, then they’re going to start reducing your Social Security benefit depending on how much money that you make for the year. But if I’m looking at a decision to claim late or to claim early, sometimes claiming early is often the best case.
Al: And so there’s a couple of reasons why you would. The main one is you actually need it. If you need it, you need it. If you can’t work or you’re not able to work or you’re fed up with working, that might be another reason. So you need it. That would be one thing. Another reason you might claim early is if you feel like you have impaired life expectancy. So maybe you know you want to retire so that you can live out your retirement years, whatever you think that they may be. That could be another reason. But in many cases, it makes sense to claim later because we’re living longer. And so you can sort of think of Social Security as a long term income insurance, because since we’re living longer, it could really help out later in life.
Joe: Yeah, you have to look at it in a rational world, what do you look at Social Security?
Do you look at it as an asset or do you look at it as income? Al and I believe that it’s income. So the larger income floor that you can have, I think we find that most people feel more comfortable with the larger fixed income. But the problem is that when I don’t necessarily want to wait until age 70, I would rather take it at 62 or 65 or whatever, because it’s like, “Oh, where am I going to pull from?” I’d much rather take the Social Security than pull from my assets.
Al: Yeah, we get that a lot. So it’s a decision that you need to make carefully. I want to pivot, though, to another key. Another key is what are you going to do with your lifestyle, with your time? And Joe, I think right off the bat, it’s where do you want to live? A lot of people want to stay in their own home, which is great. Some people want to move closer to their kids or grandkids or something like that. So that’s one decision you got to think of about right off the bat.
Joe: Really good point because we live here in Southern California. So what we find is a lot of times people will move out of Southern California. It’s a little bit too expensive, or maybe the taxes, or they just want to get out of California for whatever reason. So planning that out ahead of time. Do you want to stay in the house that you live in? Do you want to downsize? Or maybe you want to upsize and maybe get out of Southern California and go somewhere that’s a little bit cheaper and have a lot larger home?
Al: And be able to travel more or whatever. And along that, Joe, is how are you going to fill your time? What’s going to get you up in the morning? And it can’t just be reading the paper, or it can’t just be playing golf. Because for the people that do that week in, week out, day in, day out, you start to get bored. You need to have some kind of passion. And for some of you, maybe it’s being with kids and grandkids. Some of you might be volunteering. Some of you, it might be, like my dad played in an orchestra. Whatever gets you excited. And I think people don’t think about this and they spend so much time thinking about finances, they don’t really figure what they’re going to be doing with their time.
Joe: Yeah, they stress about do I have enough? Do I have enough? Do I have enough? And a lot of times when they transition, it’s like, Oh, now what do I do? I’m just going to hang out on the couch and annoy the heck out of my spouse. So yes, you want to look at where you want to live, what that lifestyle and what your purpose is going to be. And look at your health. The healthier you can be, the cheaper your overall retirement is going to be. Go to our website, folks. Yourmoneyyourwealth.com, click on our special offer this week. It’s our retirement readiness guide. Are you ready for retirement? Well, we’ll find out. Go to yourmoneyyourwealth.com, click on that special offer, our retirement readiness guide. We gotta take another break. Show is called Your Money, Your Wealth®
Joe: Hey, welcome back to the show. Show is called Your Money, Your Wealth®. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, alongside Alan Clopine, he’s a CPA. Are you ready for retirement? We’ll find out. Go to yourmoneyyourwealth.com, click on our retirement readiness guide. It’s our special offer this week. Yourmoneyyourwealth.com. If you like taxes, stick around for this segment. But before we get into that, let’s see how you did on the true/false question.
Al: “Working a year or two longer than your planned retirement date can have a significant impact on your retirement lifestyle spending.” Mr Anderson, true or false?
Joe: That depends.
Al: You’re supposed to say true or fale.
Joe: True. So there’s a lot of levers that you could pull. This is the cool thing about planning. Once you get things on paper, it’s like, Well, if I work another year, what is that to you? If I retire a year early, what does that feel? Maybe I work part time. Maybe I quit the stressful job and do something that I really enjoy. There’s a lot of different things that people can do to move levers to increase their overall spending by 10% or 20% or have the money last another 5 to 10 years.
Al: Yeah, it is interesting. And when you think about it, if you wait a couple more years, you’re saving two more years, you’re not spending.
Joe: We’ve been talking about keys to your retirement, and inventory is one of those big keys. How much money do you have in each of these different tax pools? Like taxable, tax-deferred, tax free. Tax free, for example, would be a Roth IRA or Roth 401(k). Tax deferred assets would be the standard IRA or retirement account. A taxable investment is a capital asset, it’s a brokerage account, it could be real estate. So you want to make sure that you understand how these assets are going to be taxed as you create the income. Because if you can reduce your taxes long term in retirement, then that pushes those dollars even further. But they have to understand what tax bracket they’re in and so on and so forth.
Al: You do. And I think that’s what’s confusing to a lot of people. How do I devise a tax efficient distribution plan? In other words, where do I take the money from? And there’s a lot of confusion out there as to where you really should take the money from. And if you look at the tax brackets, you’ll see that there’s a 10% bracket, a 12% bracket, a 22%, 24% and so on. So now it’s a matter of, take a look at what your income is in retirement and your deductions. So just do a real simple example. Married couple, your income is $130,000 and your deductions are $30,000. So your taxable income is $100,000. Now, if your taxable income is $100,000, then you go back to this table and you look, Oh boy, I guess I’m in the 22% bracket by a little bit here.
So what that tells you is that you can pull maybe most of your income from your retirement account and still stay in the lowest bracket. But maybe the last $15,000 or $20,000 of income, you want to take that from a Roth IRA that’s tax free, or maybe you want to take that out of a non-retirement account, which could be capital gains, which would be a lot cheaper rate. If you do that year in, year out, you’re going to have a lot less in taxes.
Joe: Understanding the tax brackets and looking at the inventory, where the money’s held is key.
It’s looking at how much money should I be pulling from my retirement accounts? How much money should I be pulling from my Roth? How much money should I be pulling from my brokerage account? It’s going to have a key effect on the overall taxes that you pay. Let’s switch gears here. Let’s go to Ask the Experts.
Al: This is from Nancy in La Mesa. “How do I estimate how much I’ll need for retirement when I have to care for my mom who is just diagnosed with Alzheimer’s? Her income is basically limited to Social Security.” That’s a tough one. Because you save for yourself, and now it’s like an aging parent, and the parent doesn’t have a lot of money. Unfortunately, these long term care facilities are pretty expensive.
Joe: Yeah, a lot of people that are in retirement now are in the sandwich generation, is what we like to call it. It’s that baby of elderly parents that you have to care for. Or you still have kids potentially on your payroll. So you’re kind of stuck in the middle here and money is going every which way but your overall retirement. This is a tough one. Of course, you’ve got to take care of yourself, but it would be hard to not take care of mom too, who took care of you. So looking at planning and looking at Medi-Cal. Is there any type of assistance that you could get from the state or that she could get from the state?
Al: Medicaid or Medi-Cal in California, that’s designed for folks that are out of money. And so you go into a special facility. Medicaid, that’s the national program, Medi-Cal in California. And basically if you have any income, except for small amounts, it goes to the facility and the rest is paid by Medi-Cal. So there is that available. It may not be your top choice and a place to go to, but some of these facilities, I know from experience, are decent. So that would probably be a way to go.
Joe: But on the other side, what people are doing too is they’re funding all this money for kids’ college, and they’re not even saving a dime in their overall retirement. It’s like the kids can get a loan. You cannot get a loan for your retirement. You can’t do it. You’re going to have to continue to work or live off the state.
Al: This is from Glen in Mira Mesa. “If I contribute to my SEP-IRA this year, it will bump me down a tax bracket. How do I weigh that against long term benefits of contributing to my Roth instead?” Oh, that’s a good question. What do you think? We might even have a different answer, but why don’t you start?
Joe: Well, it’s all going to depend on what Glenn’s tax bracket is. If he’s in the 12% bumping him down to 10%, well, who cares?
Al: Or if he’s in the 24% bracket bumping down to 22%, who cares? But if he’s in the 22% going down to 12%, that’s a much bigger difference and you’ve got to look more closely at that in terms of what bracket he’s going to be in in retirement.
Joe: So the best way to look at this is to say, where are you in the tax bracket? We just went through the brackets. And you want to save enough into the overall SEP plan, or your 401(k) plan. Anyone. A SEP is just a retirement plan for a self-employed individual. So anyone with a retirement plan should be doing this. Say, what tax bracket are you in? Before you start your savings. And if you’re in the 10% or 12% tax bracket… this is not advice, but just a couple of guys talking. I would go Roth, because those are really low brackets. But then, once you get into the 22% or 24%, then its decisions. How much money do you have in an IRA versus a Roth IRA versus a non-qualified account? Then you can start really weighing out the pros and cons of tax deferred versus tax free. In my humble opinion, I love tax free way better than anything else. I’m just getting it out of the way. I’m ripping off the Band-Aid, I’m paying the tax, I’m getting them into a Roth IRA and let it grow tax free for the rest of my life. So that’s just my opinion. Big Al will just drive into the numbers like you wouldn’t believe. To the gnat’s behind.
Al: I think I agree with that. And especially because when you pay the tax out of sight, out of mind, you never have to worry about it. Because most people when they try to save money on taxes, they spend it.
Joe: So what were the key takeaways from this program? Well, first of all, you’ve got to decide, can I afford to retire? You’ve got to have to do some planning. How much money do you have or how much money are you spending and how much money do you want to spend? Then you have to dial in your Social Security strategy. And then you’re looking at, what the heck do I do with my time? Stay active. Find that purpose. And then, of course, you always want to make sure that you’re mitigating taxes. I don’t know in that order, but you want to make sure that you get all of these keys dialed in before you take the plunge. So that’s it for us. Go to yourmoneyyourwealth.com, click on that special offer. It’s our retirement readiness guide. Yourmoneyyourwealth.com. We’ll see you again next week. Take care, folks.