Are you ready for retirement? Are you prepared? Are you nervous? How you prepare in the last few years before you retire will greatly impact what kind of retirement lifestyle you’ll enjoy. This week, Joe and Big Al count you down to retirement with the must-do preparations that’ll get you ready to punch the clock for the final time.
Download the Retirement Readiness Guide for free:
Important Points:
- 00:00 – Introduction
- 01:31 – Counting Down to Retirement: Prepare, Transition, Retire
- 02:22 – Prepare: Determine your retirement age
- 03:13: Retirement savings needed by age
- 04:10 – How will you spend your time? Lifestyle change age 65+
- 04:47 – Retirement spending habits
- 05:22 – Healthcare costs in retirement
- 05:40 – When to take Social Security benefits
- 07:08 – Download the Retirement Readiness Guide for free
- 08:10 – Transition: Catch-up contributions allow a 50-year-old with no savings to max out their 401(k) and have over $1 million by age 70
- 10:04 – Employer matching contributions and beyond
- 10:59 – Health Savings Account (HSA) tax-deductible, tax-deferred, tax-free savings
- 12:03 – Asset allocation during the transition to retirement
- 13:37 – Taxes on big moves: selling a business, relocating or selling home, rollover accounts
- 14:49 – Planning your exit strategy: timeline, succession, healthcare, selling assets
- 15:30 – Download the Retirement Readiness Guide for free
- 16:28 – Over a third of retirees wish they had chosen investments with a steady income stream
- 16:51 – Retire: From a Saver to a Spender: Determine expenses and monthly cash flow
- 18:25 – Sequence of returns risk and market volatility
- 19:49 – Taxation on retirement withdrawals
- 21:02 – Portfolio management: reassess risk, asset allocation, extending principal, tax loss harvesting
- 21:36 – Spousal changes: survivor benefits, divorce benefits, widow’s tax
- 22:43 – When is the best time to do Roth conversions, before or after I am retired?
- 23:34 – Download the Retirement Readiness Guide for free
Subscribe to Your Money, Your Wealth® on YouTube!
Transcript:
Joe: We are counting you down to retirement today. Folks, are you ready? Are you prepared? Are you nervous? Welcome to the show, folks. Show Called Your Money, Your Wealth®. Joe Anderson here, CERTIFIED FINANCIAL PLANNER®, president of Pure Financial Advisors. And of course I’m with the Big man, Big Al Clopine. How you doing?
Al: Good morning.
Joe: Good morning to you sir. We’re counting down retirement.
Al: Can’t think of a better topic.
Joe: Lot of things to consider when you’re counting the days to retirement. When are you gonna claim Social Security? Do you have enough money? What age do you wanna retire? Do you have a strategy in place to make sure that you don’t outlive your assets? That’s today’s financial focus.
All right. Here’s a little fun stat for y’all. Average retirement savings, Al is about $500,000. 538,000 to be exact. Well, what state do you live in? If you live in the good state of California? The minimum savings to retire this is by Kiplinger, says that you need about 1.5 million. Well, I got 500. I can’t live in California, West Virginia. A little bit more reasonable. $650,000. So when you’re thinking about retirement, the state you live in is also a key factor. Let’s bring a lot more things down and let’s bring in the big map.
Counting Down to Retirement: Prepare, Transition, Retire
Al: We are counting down to retirement today. Exciting topic. So obviously we need to prepare. What are the steps that you need to figure out to prepare to retire? Then even more fun is the transition because it’s getting close, right? How do you need to transition into retirement and then. You get to retire. You’ve been working all this time, you wanna retire, you wanna do all that fun stuff you haven’t had a chance to do before. Let’s talk about the steps required there to make it successful. So Joe, I can’t think of a better topic for us to talk about today.
Prepare for Retirement
Joe: Unfortunately, people just jump here. You have to start here. You gotta prepare and then you have to get this transition plan in place and then you can retire. So let’s get to it. Prepare. You gotta determine your retirement age. A lot of things to consider First. What is your current financial situation? Do you feel pretty good about it? Do you know how much money that you need depending on what age you wanna retire?
What are your goals? What’s your health? Do you wanna retire early because you might have shorter life expectancy? I. Or Social Security. When should you be claiming that, because this is gonna be a big portion of your overall strategy, depending on the retirement
Al: age? It’s so true, Joe and everyone’s situation is different.I mean, we’re all, we all have different financial situations where you have different health. we have different. ability to handle risk in the market. But let’s kind of take a little report card. Where are you? How are you doing right now? based upon your age, and when you look at, if you’re aged between 40 and 46, you should have about four times your salary.
So just take a look and see where you’re at. 51 to 55, a little over five times, and so on. You get to 61 to 64, right about the time you wanna retire. You ought to have about eight and a half, maybe nine times your salary for a successful retirement.
Joe: Yeah, these are big numbers, but this is to get you kind of in the mindset, right? These are rules of thumb. So if I am, you know, approaching 50, I went about four times. Do I have four times? If I don’t have that’s okay. Then it just. It makes me realize I probably have to save a little bit more money, or I gotta retire a little bit later. If I’m at my sixties, mid sixties here, now it’s eight or nine times.
If I don’t have that’s okay. There’s another formula that you need to be thinking about. How much money are you spending? What is your fixed income? What is that shortfall? So this is just a gauge to say if you’re close to these numbers, you are on track. If you’re not, don’t worry about it. You just wanna make sure that you have that report card. It also depends on how you’re gonna spend your time too, Al.
Al: Yeah. I guess if you don’t travel much and, watch tv, it may not, be that expensive, but this is really interesting. This is how retirees are spending their time on an average basis. So, believe it or not, 4.3 hours, per day watching tv.
Maybe only 30 minutes socializing and 20 minutes in sports or exercise. You know, if you think about your retirement, it’s probably not what you thought your retirement might be, but you gotta think about what do you want to do in retirement, because that’s part of this preparation.
Joe: Let’s talk about where you’re spending your money today and where you potentially will be spending your money in retirement.
Right now, large expenses for people approaching retirement is probably on housing and probably not a huge expense on healthcare. Once you retire and get a little bit older, these probably flip flop on you, so you’ll spend a little bit less on housing. They’re probably a lot more on healthcare. So understanding where that budget comes into play, Hey, I’m gonna pay off my mortgage, but all of a sudden, hey, my healthcare expenses will go up. So just making sure that you’re accounting for this.
Al: Yeah. An interesting stat, Joe, is Fidelity takes a look at this and average 65-year-old couple, how much money do you need for medical expenses that you’ll be out of pocket? It’s overwhelming, but if you think about it, if it’s eight. Nine, 10,000 a year per person. At least that’s something you can think of you can pay for through cash flow.
Joe: Hey, I want to talk about fixed income in retirement and Social Security claiming strategies because I think it’s interesting when you put the raw numbers down of how big of a benefit this actually is. Let’s just assume your benefit at full retirement age is $3,800 a month. If you take it at 62, you get a 30. Percent permanent haircut for life. So instead of 3,800, you get $2,700. Now if I wait until age 70, I get an 8% delayed retirement credit. So from $2,700, if I claim it the earliest I can up to the latest. Is 4,700. So most people still take it at 62, 63, 64, depending on their retirement age. A lot of times they say they want to claim it later because these numbers look large and it makes sense. But still, people claim it early. But if they look at the cumulative difference, if they look to age 90. It’s a half a million dollars from 62 to 70.
Al: Yeah, I mean, that’s a big chunk of change. it’s a lot of money when you think about it could I come up with an extra half million dollars in retirement? Well, here’s a way to do that. Now, of course, this doesn’t apply for everybody. Some people need to take it early. They retire early whether they wanted to or not. They need the cash flow. I understand that. But if you can hold out as long as possible, maybe even to age 70, and you have a reasonably good life expectancy, you’ll be very happy you did that.
Joe: Hey, if you need more help, you know where to go. Go to your money or wealth.com. It’s our Retirement Readiness Guide this week. It’s the Countdown to Retirement. Are you ready? Get the Retirement Readiness Guide. If you’re not your money or wealth.com, click on that special offer. You can download that PDF right there on your computer, absolutely free at YourMoneyYourWealth.com. Click on this special offer. Alright, we gotta take a short break when we get back. We’re gonna talk about the transition into retirement, and then finally, when you retire, what are the steps that still need to happen in countdown to retirement? We’ll be right back.
Transition to Retirement
Joe: Hey folks. We’re counting you down to retirement. If you need more help with that, where else to go? YourMoneyYourWealth.com. Click on our Retirement Readiness Guide. Get ready for retirement. As we are counting you down, there are multiple items that you wanna make sure that are buttoned up. Go to YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. Now let’s see how you did on that true false question.
Al: Could a 50-year-old with no savings max out their 401(k) and have over a million dollars by age 70. True or false? Believe it or not, that’s true. Although you gotta save a bit and you need to have a certain rate of return. But show us the numbers, Joe.
Joe: Yeah. You know, right now, depending on your age, we get major catchups, right? So you get money into the 401(k). Right now it’s 23,500 is the maximum allowable contribution into a defined contribution plan. If you’re over 50, you get another $7,500 in a standard 401(k) plan. This is not including any after tax dollars 23 5, 70 $500, age 50 to 59. Your total contribution in that time period is around 300,000.
Now, for those of you that are 60 or 63 in that age range. Right now you get a jumbo ketchup. It’s not 7,500, it’s 11,250. You do that for those years. It’s another 140 grand. Now you go to 64 and 70, $7,500 ketchup. Add another 217001.3 million if you get a 6% annual return. And that’s not assuming any inflation on the increase in the total amount of 401(k) contributions.
Al: That’s true. That’s kind of just a fixed number from where we’re at right now, so I know that’s a lot to save. Right. If you break it down by paycheck, monthly or bimonthly or weekly, however you get paid, it’s a lot more palatable. So just realize if you’re at age 50, for example, and you’ve done almost nothing, yeah, you gotta make some changes.
You gotta probably make some cuts to be able to save more, but you can still have a great retirement. Alright, let’s get into more
Joe: transition. Alright. Let’s say employer match. Are you taking advantage of the employer match? Well, I would say almost more than 50% of people are not taking advantage of the full match.
Al: Yeah, and that’s surprising, right? Because you know how a match works, right? You put in a dollar, your employer puts in a dollar. Or you put in a couple dollars and your employee puts a dollar. It depends upon the plan itself, but that’s free money, right? So there’s a level of match on all of these plans.
So make sure you put enough into your 401(k). I don’t care what age you are, make sure you put enough into your 401(k) to at least get the match, because that’s free money. Now, if you really wanna save successfully for retirement, you’re gonna do more than the match. Hopefully max it out. As we just talked about, Joe maxing out, especially in later years, makes a big difference.
Joe: Absolutely. So make sure that you take that free dollars off the table and put it right into your overall retirement account. Here’s another strategy. Let’s say if you have a high deductible healthcare plan, there’s something that’s called an HSA – Health Savings Account, right? This is the triple threat. You get a pre-tax contribution, it grows tax deferred, and when you pull those dollars out for healthcare costs, it’s a hundred percent tax free. Tax deductible, tax deferred, and tax free. One of the best accounts you can possibly invest in. If you don’t need these dollars for healthcare expenses, you can roll it into an IRA and save that for retirement. But if I have no savings, 15 year contributions, get a 7% annual return, 24% marginal tax rate. Here’s kind of the max benefit that you could get. I mean, it’s huge. $288,000 at the end of that time period. It’s therefore healthcare costs.
Al: Well, and you figure, you know, as we get older, we spend more on healthcare, so to have that money coming out tax free, right, we get a tax deduction and it comes out tax free. That’s a pretty nice thing. Of course, you have to have a high deductible health insurance plan to be able to qualify for this account.
Joe: As you’re transitioning and counting down to retirement, you might need to re-look at your overall asset allocation, how much money you have in stocks versus bonds versus cash versus real estate. Do you have any money in smaller companies versus larger companies, value versus growth, and so on and so forth. If I’m in my fifties, I probably wanna have a little bit more stock. Allocation or a lot more stock allocation than bonds. Maybe it’s 85 to 15 or 65 to 35% differential ratios, right? Be because I need more growth in that portfolio and I can live through the ups and downs because I might still have a 10, 15 year, 20 year time horizon until I finally retire.
Once I get to my sixties, you might wanna turn that risk down because now you’re approaching, you’re counting down to retirement that, hey, you might retire in the next five years or 10 years, or. Right now at age 60. So looking at the asset allocation is key because the last thing you want to have happen the day you retire, the market implodes. And you have a portfolio as a 50-year-old when you’re actually 65.
Al: Yeah, no question. And obviously the reason why we have bonds and portfolios and recommend them is that when you’re in retirement, now all of a sudden you’re pulling money out. And when you’re pulling money out, you don’t wanna have all your money in the stock market because as we know, it’s volatile. You still need stocks. Because you retire 65, you may live into your nineties. You still need growth, but you gotta have some safe money too to withdraw funds for your expenses.
Joe: Alright, another transitioned taxes on big moves. Let’s say you own a business trying to figure out how do I liquidate some shares of the company that I work at, or maybe I own the company of. What is that liquidation plan or succession plan here? How about if I relocate, sell my home or if I have a rental property that I don’t necessarily want to deal with renters anymore? Rollover accounts, so you have a big retirement account. A lot of mistakes happen here. So just understanding the taxes on these big moves. These could be the largest assets that you currently hold. You wanna make sure that you do that right, the transition. Right. Just to make sure that you’re not giving more to Uncle Sam than you. absolutely have to.
Al: Yeah. And the good news, Joe, is that when you sell a business or you sell real estate, it’s a long term capital gain.
As long as you’ve held that asset for more than a year. Capital gain rates are a lot cheaper than ordinary income tax rates, but there still can be a lot. So you may wanna, stage it, you may, want to do a deferred sale on your real estate rental property. You may even wanna do a 1031 exchange into another property. Just realize this is a big part of transitioning.
Joe: Now was your exit strategy. Set a timeline. What is the succession plan? Healthcare option, sell or liquidate your assets. Let’s say if you’re a business owner. There’s a lot of different things that you need to be thinking about, right? If I’m selling a business, the timeline, it could take you a year, and a half to find a buyer, find a broker, find the right price, clean up the books, right?
Find a succession, who’s gonna come in and take over the business? Healthcare options. I’m retiring early, I don’t have a business anymore. How am I gonna have the healthcare? Do I have to privately insure? And then selling, liquidate those assets. As Al just said, you know, be very careful of the tax consequence of the big moves that could happen right at the end of your working years as you count down to retirement.
If you’re count down to retirement, you need some help, go to YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. Get ready for retirement. It’s a fun field guide to make sure that you’re checking all of the boxes in regards to your retirement YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. Download it right there. The comfort of your own home. You gotta take another break. When we get back, we’re gonna wrap things up, talk about retirement. Then we’re gonna flip the script, answer your questions, don’t go anywhere.
In Retirement
Joe: Hey, welcome back to the show. We’re counting you down to retirement today, folks. Are you ready? Well get ready for our Retirement Readiness Guide. Go to YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. Let’s see how you did on that true false question.
Al: Over a third of retirees wish they chose investments with a steady income stream. True or false? Well, I guess that is true.
Joe: Yeah, around 40% want that steady income stream. So they take their larger asset and turn it into a guaranteed income stream. 36%. That seemed a little high to me, but there you have it. Now you’re retired folks, so you transitioned, you were saving money to build up the nest day. To now a spender monthly income. Just take a look at your pension if you have one, or if you purchased a, an annuity for a guaranteed income stream, whatever your Social Security benefit’s going to be. Wanna take a look at other income.
This could be, maybe you’re working part-time, you have a side hustle, maybe it’s real estate income, right? And then you’re gonna have to take a look at your investment income. That will be total, right? So this is your total income. And then you have to look at expenses. What’s your essential discretionary?
You take your total minus your expenses. This is your monthly cash flow. Another way to look at this is that figure this number out first. What does it take for you to maintain the lifestyle that you want and then look at your pension and Social Security, right? And then that’s gonna determine how much investment income that needs to derive from the overall portfolio.
Al: Yeah. Very important step. and I think, just thinking about expenses, this is a really good exercise to go through your expenses, figure out what’s essential that you have to spend. And discretionary because the markets go up and down at different times. If you have years where the markets are great, super discretionary expenses, do those vacations, but years where markets go down, you may wanna pull back a little bit, maybe not have some of those discretionary expenses. That’s what gives you a much better chance of having a great withdrawal strategy that where you’re not gonna run outta money.
Joe: One of the biggest risks that retirees have in retirement is sequence of return risk. We can control how much money that we pull out. We can’t control potentially of the taxation of that distribution, but we can’t control markets.
That’s why having a strategy, a withdrawal strategy specifically is so, so important. Simple illustration you have, Sarah is in the green. You have, Mike is in the red. Sarah, she retired in January of 1998. Gave her a little spike. They both started with a million dollars. Mike, he was in August. Well, the market dropped in August, so when they pulled that $60,000 out. Right. You could see that it was a huge difference over that timeframe, about 300 grand. If I’m pulling dollars out in a Dow market versus an upmarket, it makes a huge impact long term.
Al: So you think about what could Mike have done to make this work a little bit better? So you gotta figure out the investments that you have.Maybe if Mike had a little bit safer portfolio with more bonds, he could have pulled money out of the bonds that held their value in a down market. And secondly, like we just talked about, take a look at your expenses. What’s essential, what’s discretionary. Maybe you don’t spend on the discretionary expenses in a down market, but you’ll have plenty of chance to spend when the market comes up later, then you can make this thing work.
Joe: Yeah. Another thing that you can’t control is the taxation on your overall withdrawals. So if all of your money’s in a tax deferred account, as you pull those dollars out, you’re going to be taxed at the highest of rate. Ordinary income tax free. Well self-explanatory. Everything you pull out of there is 0% taxable investments.
Right now, you’re taxed at a capital gain depending on what the basis is. So if I bought an investment for a hundred thousand, it’s worth 200,000. I pulled the 200 grand out. I’m taxed on the a hundred thousand dollars gain, and that would be at a cap gain rate. So that is going to be lower in most cases than tax deferred.
And it’s gonna be higher than tax free. So as you’re thinking about a withdrawal strategy. Right. We talked about things you can’t control. You can control how much money that you pull out on a monthly, quarterly, annual basis. You can also potentially control the taxes that you pay on the distribution if you do the appropriate planning.
Mostly what we see. Is that a lot of you have all of your money here and you have very little control as you’re taking dollars out of the account because all of those dollars that will be taxed at ordinary income, if you have dollars in each of these different pools, potentially you can control your tax by a lot better.
Al: Yeah. Let’s also talk about your portfolio itself. So when you’re retired, make sure you got the right portfolio for your goals. You may need to look at your asset allocation, maybe have a little bit safer, allocation. Reassess that risk. ’cause you wanna make your money last, right? You don’t wanna run outta money.
And then when the market does go up and down, there are strategies when it goes down. You can sell an asset in a brokerage account. Take a tax loss, buy something similar. So you’re still in the market, but now you’ve created a tax loss, an opportunity out of a down market.
Joe: Alright. Another fact of life here is that there could be spousal changes as you live longer. Survivor benefits from a Social Security perspective, so you lose one person’s benefit. But the surviving spouse takes the higher of the two to force benefits. So if you have been married for an individual for 10 years, you can still claim a spousal benefit or a survivor benefit on that individual. Unfortunately, there could be something that’s called the widow or widower’s tax. What that means is that if you have a lot of money in a retirement account that we just went through. All of these accounts, right? There’s something that’s called a required minimum distribution. There’s a force out. They want you to take those dollars out. At 70 and a half, it was 71, 73. Now it’s gonna be 75. They want more and more of those dollars to get pushed out because they get taxed. If I lose my spouse and if I don’t remarry, all of those dollars still have to come out, but they’re gonna come out at potentially a higher tax rate because now I’m paying at a single rate versus a married rate. Alright, let’s flip the show to you. Let’s answer one of your questions.
Al: When’s the best time to do Roth conversions before or after I’m retired. This is from Rachael in Seattle. Well, I’ll give you a quick answer, Joe. I’m sure you’ll elaborate. It depends upon your tax bracket, right? Take a look at your tax bracket today versus retirement. For many people it makes sense to do Roth conversions even while you’re working because the tax brackets are stretched so high. Right now under the current rules, you can get money into a Roth IRA without paying a ton of tax, but in many cases, you might wanna wait till the bigger Roth conversions tell you retire when you’re in a lower bracket.
Joe: I would always wanna look at, does it make sense each and every year when markets go down? You might wanna do a Roth conversion. All sorts of different ways to be thinking about strategy in regards to your overall retirement. We’re counting you down to retirement folks. Good luck with everything. If you need more help, go to YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. For Big Al Clopine. I’m Joe Anderson. We’ll see you guys next time.
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.
