Do you need to pull over and ask for directions on the road to retirement? Mile Markers along the highway let you know how much you’ve traveled and how much more you’ve got to go. When it comes to retirement, those Mile Markers can let you know if you are on track to retire comfortably… or not. With discipline and dedication, you can grow your wealth. Joe Anderson and Big Al Clopine will help you stay out of the ditch and ensure you’ll have enough gas to make it to the finish line!
Retirement Mile Markers:
- 20 years from retirement: Spending and Savings
- 10 years from retirement: Asset Allocation and Asset Location
- 5 years from the finish line: Social Security Benefits and Withdrawal Strategies
Important Points:
- 0:00 – Intro
- 1:52 – Retirement Mile Markers
- 3:19 – Retirement Spending
- 5:10 – Retirement Saving
- 7:10 – Age Mile Markers
- 8:00 – Download the Retirement Readiness Guide
- 8:47 – True/False: Roth Conversions should be done 10 years before you retire.
- 9:44 – Mile Markers 10yrs from Retirement
- 10:56 – Asset Allocation
- 15:30 – Downsize Debt
- 16:27 – Age Mile Markers
- 16:50 – Download the Retirement Readiness Guide
- 17:45 – True/False: The average monthly Social Security check is $2,000
- 18:16 – Mile Markers 5yrs from Retirement
- 19:00 – Social Security Strategy
- 20:29 – Withdrawal Strategy
- 22:10 – Age Mile Markers
- 22:29 – Pure Takeaway
- 22:44 – Download the Retirement Readiness Guide
Transcript:
Joe: Are you on that road to retirement? Well, there’s some mile markers that you don’t wanna miss. Do you know what they are Welcome, Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors, and of course, I’m with the Captain. We call him Big Al Clopine. Hello, Big Al.
Al: I’m the Captain now. Okay, I’ll take it.
Joe: We’re on the road to retirement, Al. We need a driver.
Al: Okay, I’ll do it. I’m ready. I’m gonna drive it.
Joe: You’re gonna drive us home. You’re gonna drive us home. Hey, when you’re thinking about how much money that you need for retirement, take a guess how much most Americans think- they need about $1,000,000? That was last year. 2001. Guess what? A little inflation. Increase that by 20%. So 2022, $1,200,000, that most Americans believe that they need to have a comfortable retirement. Do you have that kind of cash? Well, you need to pay attention to those mile markers on that road to retirement. That’s today’s financial focus. Most people plan to retire at 66 or later. Right, but in actuality, most people retire a lot younger, 61, right? So we’re thinking, hey, I still have time. I can still save a little bit more money, push out that Social Security. But in reality, we’re retiring a lot earlier. So you gotta make sure that you’re buckled up and ready to go. Let’s bring in the big man.
Al: All right, so the mile markers- we’re gonna take a little drive today, so we’re gonna look out 20 years from retirement, 10 years from retirement, 5 years, and let’s see how you’re doing. So starting with 20 years, we gotta focus on what you’re spending now. Are you saving enough? We’ll kind of go through some calculations there. Then 10 years out. What are you invested in? Where’s- what’s your asset location? Right? What kind of tax plan do you have? And then we get into 5 years. What’s that withdrawal strategy? Do you have enough benefits to be able to get through? So Joe, I think this is gonna be kind of a fun show because people sort of need to know where they’re at different points, kind of make sure they’re on track.
Joe: Yeah, without question, because I mean, you should be looking at this all the time.
Al: For sure.
Joe: Right? But when you start your journey, let’s say you got 20 years to retirement, you know, you wanna make sure that you’re taking a look at, all right, well, am I on track? Or what do I need to do to get on track? And I think savings is the key, right? Pay yourself first. So 20 years out from retirement, you probably want close to 5 times your annual income in a nest egg. So if you’re making $100,000 a year, Big Al, you need-
Al: Better have 500,000, right?
Joe: Got $500,000.
Al: Easy enough math. And if you’re, you know, if you’re 10 years out, maybe $700,000, 5 years out, maybe $900,000. You kind of fast forward to 65 or 67, you know, maybe at retirement 10 times. 12 times. These- these are not gospel. This is just kind of a quick rule of thumb. You know, if you’re like one time salary and two years to retire, you got some work to do, right? On the other hand, if you’re 20 times salary and you got 15 years to go, you’re in pretty good shape. So this will give you an idea kind of where you stand.
20 Years: Spending and Savings
Joe: Let’s start here. Retirement and Income Shortfalls and Projected Savings Needs. So we’re 20 years out, so here are the mile markers that we wanna make sure that you’re taking a look at. Retiring in 20 years. Here’s really good math and calculations that you can do at home. It’s pretty easy. Let’s say you’re currently spending $80,000 a year. This could be $60,000, it could be $180,000. It doesn’t matter. I just wanna show you the math. Retirement spending. You wanna make sure that you inflate this number. So $80,000. I’m not retiring tomorrow. I’m retiring in 20 years, so I have to inflate that $80,000 to future dollars. So let’s use a 3% inflation rate so that $80,000 is now $144,000. Okay, so then I wanna do some benefit projections. Do I have Social Security? Am I going to have a pension? Maybe I have some real estate income, whatever your fixed income sources are going to be, and then just inflate those out as well. So $80,000 is my starting point. I inflate that to $144,000. I look at what other type of benefits that I would receive besides my nest egg in the future, inflate that out, and I’m gonna come up with a shortfall. So $144,000 is what I wanna spend. $55,000 is what’s gonna come into the household as a fixed income. So I’m going to have a shortfall here of about $90,000.
Al: Yeah. And I think it’s such an important calculation, and it’s really easy when you’re out, you know, 20 years or more out from retirement. Sometimes it’s hard to realize that $80,000 that you’re spending today, it’s not what it’s going to be in the future. So to be clear, when you add inflation, the $80,000 is like $100,000- it’s what, $144,000m would spend like in 20 years from now using inflation. I know sometimes it’s hard to believe. I’m not gonna spend more than $100,000, but with inflation 20 years from now, yes you will. And you have to plan for that. And you know, when it comes to benefits, Joe, you know, you could use that same inflation rate, but sometimes Social Security doesn’t keep up. So sometimes we use like a 2% inflation rate on that just to be more conservative.
Joe: Yeah. Good point there. So maybe I want to inflate my expenses out a little bit higher. And then my fixed income sources, I want to inflate those a little bit lower, just to be conservative, right? So here we are, 20 years in the future, $89,000 shortfall. That is what needs to be derived from the overall portfolio. That is my shortfall from an income perspective. So the good old 4% rule. So the 4% rule basically states that you don’t wanna take up any more than 4% out of the overall portfolio, right? Probably 3% is probably a bit- a little bit better number, but let’s just stick with 4%, cuz the math is pretty easy. $89,000. Well, how much will I need as a nest egg? Well, 89 times 25. Or if I divide 89 into 4%, I would need $2,200,000. That is my goal as a nest egg to create this scenario. My current savings, let’s say it’s 5 times that salary, I’m 20 years out, it’s $400,000, so I need to get to $2,200,000. Well, now my yearly savings goal would be roughly about $25,000 a year. So just maxing out my 401(k) plan and maybe a Roth.
Al: And if you’re not there or not close to there, start working towards that number to be able to get as close to your retirement goal as possible.
Joe: Yeah, I guess at the end of the day, you know, you want to save anywhere from 10% to 20% of your annual income. Right. So if you’re nowhere near that, if you’re at 5%, well then each year you just want to increase that overall savings because $25,000, that’s a pretty big number, but my shortfall is big too, right? So I need $2,500,000 roughly. So of course, over 20 years, you’re going to have to have some pretty good savings. So here’s a mile marker, age 50. $22,500 is the 401(k) contribution limits. But guess what? Once you reach age 50 and above, you get this catch up of another $75,000, so $7500. So if I can max out the overall 401(k) plans, let’s say I’m 50 years old, I wanna retire at age 70. Okay, well, you know, I could be on track here. Could be on track. So just thinking about different mile markers of what are the things that you need to do. The biggest point of all of this is that you have to have a strategy. You have to have a plan, right? Put things on paper. I wanna retire in 10 years, 20 years, 30 years, 5 years, whatever that is. And start thinking about what you’re spending, what that spending’s gonna look like, what your fixed income sources are, and then that can start motivating you to start saving the appropriate dollar figures. And then it’s looking at how do you invest it? Tax management, or tax manage it, and so on. So if you want help with this, you know where to go, YourMoneyYourWealth.com, click on that special offer this week. It’s our Retirement Readiness Guide. The Retirement Readiness Guide. It’s gonna walk you through all of these different calculations. You can sit there right in your living room, get your financial planning in order, go to YourMoneyYourWealth.com and click on it now. We gotta take a break. When we get back, we’re gonna talk about taxes. We’re gonna talk about withdrawal strategies, what you need to do at mile marker 10, mile marker 5, and then hopefully get you to the finish line. We’ll be right back.
10 Years: Asset Allocation and Asset Location
Joe: Hey, welcome back. The show’s called Your Money, Your Wealth®. What we’re talking about is on that road to retirement, there’s mile markers that you’re looking at, right? Are you almost there, right? You got kids in the back? Hey dad, mom, are we almost there? Well, are you almost ready for retirement? Are you doing the things that you need to do? If you need help, go to our website, YourMoneyYourWealth.com, and click on that special offer this week. It’s our Retirement Readiness Guide. Let’s see how you did on that True/False question.
Al: ‘Roth conversions should be done 10 years before you retire.’ It depends. Maybe, maybe not. The quick answer is this, you look at your tax bracket today, you look at your tax bracket in retirement. If your tax bracket is the same or lower, you might wanna be doing Roth conversions right now. In other words, if your retirement tax bracket’s higher. On the other hand, if it’s the other way, maybe you don’t wanna, maybe you’re- maybe you’re in a higher income bracket than you will be in retirement. Maybe you don’t wanna do Roth conversions right now, getting money into a tax-free environment. But Joe, there’s so many factors that really go into this. Whether, when you do it, how much you do, whether you should do it at all.
Joe: Right. If I’m in a low bracket, 0% to 12%, well then, yeah, maximize your Roth accounts. If I’m in a middle bracket, okay, well maybe you split ’em. You go a little bit of Roth and a little bit of pre-tax. If I’m on that high tax bracket, 32% to 37%, well, maybe I wanna take a look at maximizing all pre-tax. I think this is a good general rule of thumb, but there’s a lot more that’s entailed in your overall tax strategy. So let’s get into it. Let’s talk a little bit more about tax diversification, and then from there we can talk about your asset allocation. You know, downsizing your debt. So when you’re 10 years out, this is where maybe a little bit more sophistication comes in into play. Because you’re still saving that- those dollars, but you have to consider that at some point, those dollars need to be used for income.
Al: Yeah, and I think it’s such a good point, Joe. A lot of people don’t realize when it comes to retirement, it depends where your assets are located as to how they’re going to be taxed. For example, there’s what we call a tax-deferred pool. Tax-deferred pool would be assets that are in a retirement account. The money comes out, you have to pay income taxes on it. You could have a tax-free pool like a Roth IRA. You pull money out and it’s tax-free. And you may have a taxable pool, meaning you already paid taxes on it, so you may not have much to pay, or maybe you have capital gains if you have an asset for a year or- or longer. And Joe, it makes such a difference on your taxes, depending upon where you’re holding those assets.
Joe: Yeah, because this is the most popular, right? This is your tax-deferred accounts, that’s your 401(k)s, IRAs, 403(b)s, TSPs. This is where most people have a- you know, the bulk, if not 100% of your retirement plan savings, right? Because, of course they’re called retirement plans, so I’m putting dollars in, I get a nice little tax benefit from here. But what you need to consider is that on the distributions coming out, this is where the IRS is gonna get their tax dollars. So for years and years and years, it was like, well, you’ll be in a low, lower tax bracket in retirement, so just keep funding these accounts. Well, where are tax rates going? Are they going down? Are they going up? Are they staying the same? How much money do you have in your overall tax-deferred accounts? What we’re finding now is that some people might actually be in the same tax bracket or higher tax bracket in retirement because they’ve loaded up so much dollars in these tax-deferred accounts. Because at certain ages, you have to take the money out regardless if you want it or not. And if you pass away, right, well then the kids or the heirs are gonna get stuck with that tax. So what you need to consider, are you diversified from a tax perspective? So we talked about Roth IRAs, right? So depending on what tax bracket you’re in, does it make sense to forego that tax deduction to put money into an account that will forever grow tax-free? You will never pay another dime of tax on those dollars again. And if you pass away, it goes to the spouse tax-free. If the spouse passes, it goes to the kids or the heirs tax-free. So then it’s a, all right, well what maybe it might make sense to start putting dollars here. Another way to do it I s to take some of your tax-deferred monies that you’ve already saved, your IRAs and 401(k)s, and move them up here in regards to what is called a conversion. You have to pay the tax when you do this, so that’s why tax strategy is critical. But the overall concept is to have money in each of these different pools. So when it comes time to take those distributions, you can mitigate or at least control the taxes on distribution.
Al: Such an important point. So when you think about retirement, so you’re going to be in different kinds of tax brackets. So the way the tax brackets work, they start lower and they go higher. So what you really wanna do is have your ordinary income, maybe from your 401(k), your required minimum distributions, maybe Social Security, that would be taxed in the lower tax brackets, right? So you stay in those lower brackets, but you wanna spend more than that, right? So you pull money outta the Roth IRA where you don’t pay tax or you pull money outta your taxable account where you pay a lower capital gain tax. So you’re living on a higher level than your tax and your dollars can stretch a lot more in retirement.
Joe: Yeah, I mean there’s just certain levers that a lot of people can pull just to stretch those dollars out several more years. Right. And I think tax could be a huge lever for a lot of you. Let’s go into the asset allocation component. So we talked about diversification of your taxes. Most people are familiar with diversification of your assets. So what does that mean? Well, I want to have some large companies, right, the big boys, Microsoft, Google. Maybe some smaller companies, companies you never heard of that are gonna be the future Microsoft or Google, right? Maybe some international equities, right? A little BMW. Fixed income, so that’s bonds or safe dollars and some cash. So this is a moderate example is that, hey, maybe you want $35,000, $15,000, $10,000. This all really depends on what target rate of return that you’re of shooting for and what is your risk tolerance.
Al: Yeah, that’s a good point. And a lot of people try to get the best rate of return they can, which isn’t necessarily the wrong strategy, except in some cases people are shooting for the wrong rate of return. For example, let’s say you run through your financial numbers and you need to save that $25,000 a year, and all you need is 6% or 7% rate of return, then devise a portfolio that is most likely to earn that rate of return. If you are shooting for a 12% rate of return, when you need a 7%, it’s likely going to be a lot more volatile. You may not end up where you want to.
Joe: Let’s talk about debt. Snowball, Big Al.
Al: Snowball. Yeah. And- and you know, when- when it comes to debt, of course you want to try to get your debt under control at any age. But Joe, there’s a couple ways to get debt paid off. You know, the snowball is where you just look at all your credit cards and you take the smallest one, pay it off first, go to the next one. It feels good, right? Because you’re knocking these off one at a time. But that may not necessarily be the best way. Maybe you do the avalanche method, which is where you pay the highest interest rate.
Joe: Yeah. But I think it’s just writing things down again, right? So I’m approaching retirement. I might have my mortgage, I might have some car debt, I might have credit card debt, maybe I have some other ancillary debt, student loan debt, so on and so forth, right? And then, so the first step is that just rank the debt smallest to largest second. Then you’re gonna pay the minimums except for the smallest debt. Wipe that one out, and then go to the next. And go to the next. And go to the next. And repeat. Rinse and repeat. Rinse and repeat. So there’s all sorts of different ways that you can accelerate debt payments. But this is just a kind of, maybe a fun way as well, just to look at it, to say, all right, hey, I got this one done. Let’s get to the other. And then it kind of motivates us to take action a little bit more.
Al: Another thing is you want to consider different milestone ages, when you’re maybe 10 years away from retirement, like 55, for example. This is where you can retire with a 401(k) and start pulling money out. Yes, you’ll pay tax on dollars that you pull out. But as long as you retire at 55 or older and you have a 401(k), you can draw money out without that 10% penalty. When it comes to an IRA, you gotta be 59 and a half. And then also realize Joe, 62 is the first age generally to receive Social Security.
Joe: Hey, I know we’re throwing a lot at you today. Don’t worry, we got you covered. Go to YourMoneyYourWealth.com. Click on that special offer this week. It’s our famous Retirement Readiness Guide. Go to the website, YourMoneyYourWealth.com. Click on the special offer. It’s our Retirement Readiness Guide. Are you ready for retirement? Walking you through all the steps that you need to take to make sure that you can have that great retirement. YourMoneyYourWealth.com. Hey, when we get back, we’re gonna wrap the show up. We’re gonna finish up talking about these milestones on your road to retirement.
5 Years: Benefits and Withdrawals
Joe: Hey, welcome back to the program. The show’s called Your Money, Your Wealth®. Joe Anderson and Big Al, we’re helping you through that road to retirement. We’re looking at mile markers on that road to retirement. If you need help, go to our website, YourMoneyYourWealth.com. And click on that special offer this week. It’s our Retirement Readiness Guide. Let’s see how you did on that True/False question.
Al: ‘The average monthly Social Security check is $2000.’ True or false? Well, I think it’s less than that, Joe, but tell us what it is.
Joe: $1690 is an average monthly check in Social Security. So I think this is shocking to some people where like, hey, I’m, I’m going to receive my Social Security check and I should be okay. Social security was never really meant to be to replace 100% of your income. So just understand, hey, what is that Social Security benefit? Are you married? Is there a spousal benefit? Or what’s the spouse’s benefit? Is there a survivor benefit? And so on and so forth. So there’s a lot of different rules and regs when it comes to Social Security, so you want to make sure that you claim it right.
Al: Yeah. And I guess, speaking of Social Security, so we wanna spend a little time on that. We also wanna spend a little bit of time on withdrawal strategies. But let’s start with Social Security, right? So 62 is the earliest you can receive benefits. 67 is the current full retirement age if you’re born after 1959, and then 70 is the last year that you actually wanna start collecting your benefits. It grows each year, right? For example, if you’re gonna get $1000 at full retirement age 67, well you’re gonna get like $700 if you take it early per month, or $1240 if you wait on the other end.
Joe: Let’s just assume that you live until age 90. So if I take it to age 62, I want those dollars right away, right? Because I want to utilize those dollars. I wanna spend those dollars. I want to party with those dollars, or I wanna save those dollars. Do whatever that you want. So assume $1000 a month is your full retirement benefit. If you take it at 62, that’s $700 bucks a month, right? So if I look at $700 a month times 12 to 90 years old, I’m going to receive about $316,000 from Social Security over my lifetime. Pretty good number. Well, if I wait until age 67, I get a lot higher benefit. Okay, multiply that again by 12 to 90 years old, almost $400,000 out of the system. Then if I wait until age 70, I’m gonna receive $1240. So significantly more from 70 to age 62, but I had to wait 8 years to receive that overall benefit. But the total benefit that I’ll receive again, if I live until age 90 is about $429,000. If you don’t think you’re gonna live until age 90. Well then you probably are over here, right? If you think you’re gonna live 90 or later, well you’re probably somewhere on this road.
Al: I think that’s well said, cuz a lot of advisors will say wait till 70 and that, that’s a great answer for a lot of people. But basically, if you think you have a long life, right, and you don’t necessarily need the cash flow from Social Security, you might wanna wait, right? If you need the cash flow or have impaired life expectancy, maybe you want to take it earlier.
Joe: Let’s wrap up this segment, kind of looking at sequence of return risk. I think a lot of times people don’t really understand what it means, but this is two individuals. We got Mike and Alexis. They both start with $1,000,000. Alexis retires in a bull market, right? But then when Mike retires, the market drops and they’re pulling dollars from the overall account. So if you don’t have a very good withdrawal strategy or understand what target rate of return that you need, like Alan talked about before, sometimes people take on maybe a little bit too much risk because they don’t understand volatility, or maybe they’re not taking enough risk to get the return that they need to have this money last. So Mike, he’s gonna experience a 15% decline in his first two years of retirement. You can see boom, that’s gonna go down, plus he’s drawing dollars from it. Alexis experienced a 15% decline in the 10th and 11th year, right? So Alexis’s money is growing, but then it goes. Well, you still have about $700,000. Where here, you know, you can kinda see the delta, the difference.
Al: That’s really a good drawing. Joe. I think the point is this, that that you- you never know when- when the market’s gonna do, when you retire. So how you- how you kind of prepare for that is you have enough safe investments. Like for example, you know, markets may go down for a couple years, maybe 3 years, have enough safe investments for 3 years, 5 years, even 10 years if you’re conservative, safe investments, bonds, fixed- fixed income type investments, cash, have enough set aside. So no matter what the market does in those periods of time, you can withdraw from that pool of money. Let the stocks recover. They will over time, but don’t be taking money outta the stock market when it’s down. It’s hard to recover. And then something else to consider at age 65 that’s when Medicare kicks in. For 67, we already mentioned that’s full retirement age.
Joe: So what did we learn today? You wanna look at those mile markers to make sure that you’re on track, given how far you are for retirement, starting with a good savings plan, making sure that you understand what you’re spending. Then we get into taxes, asset allocation. Then you look at Social Security withdrawal strategies, and then you put that all together. And guess what? You have a great retirement strategy. You want more help, you know where to go, YourMoneyYourWealth.com. Click on that Retirement Readiness Guide. That’s our gift to you, YourMoneyYourWealth.com. Thanks so much for joining another wonderful episode of Your Money, Your Wealth®. For Big Al Clopine, I’m Joe Anderson, and we’ll see you 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 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.
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.
