On your road to retirement have you stayed too focused on just socking money away without considering blind spots that could sabotage your overall financial plan? From unexpected out-of-pocket expenses to untimely market downturns, you can lower the impact of these events by planning for them. Financial professionals Joe Anderson and Alan Clopine highlight the biggest blind spots and help you put a plan in place that can help safeguard your retirement plans.
Important Points:
(0:00) – Intro
(2:12) – Retirement Blind Spots
(4:10) – Healthcare Costs
(9:09) – Inflation Impact
(12:20) – Taxes
(16:10) – Sequence of Returns
(18:00) – Early Retirement
(20:20) – Ask the Experts
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Transcript:
Joe: As you’re driving down the road to retirement, a lot of obstacles can get in your way, but the biggest ones are those blind spots that can sabotage your entire retirement. Find out what they are. Stick around. Welcome to the show everyone. The show is called Your Money, Your Wealth®. Joe Anderson here. CERTIFIED FINANCIAL PLANNER™, President Pure Financial Advisors. I’m with a very special guest today. We got Ron Burgundy.
Al: You like my new outfit?
Joe: I do.
Al: It’s cold, I want to stay warm.
Joe: Looking sharp. Very dapper. We got the Big Al Clopine, CPA extraordinaire joining us today once again. When you’re looking at retirement, roadblocks can get in your way. More importantly, blind spots. You want to make sure that you understand what can sabotage your overall retirement. That’s today’s financial focus. A couple of things. Surveys are done all the time. They surveyed retired people, and they said, What are your top regrets? Not saving enough money, of course. It’s like, man, if I could go back in time and save a couple of extra bucks, we would all do that. Well, most of us would. Not making catch up contributions. You have a 401(k) plan. A lot of you don’t necessarily know that you can add more dollars to those 401(k) plans. Or maybe they can’t afford it. Or some of you, Hey, retire now. Why continue the work? You have enough money, but you don’t necessarily know if you can retire. Here’s the biggest thing: you don’t have a plan. 78% of people that have a plan. Guess what? They feel prepared. They feel pretty good. People that don’t have a plan, they don’t feel pretty good. Let’s get you a plan. Let’s bring in the big man. Big Al Clopine, CPA.
Al: Today, I guess we’re riding around in the car trying to avoid our blind spots. What are they? We’re going to start with health care. Health care crunch. We don’t want to get crunched by health care costs, so we’re going to talk about that. Some tips there. We’re going to get into inflation because it’s been a bit tame the last 20 years until 2021 came, it came right back and who knows what it will be. Historically, it’s something you really have to consider. Tax bill T-Bone. We don’t want to be T-boned with the tax bill. We want to understand what the tax bill is, how it’s going to affect us. We’ll get into some of that today. Portfolio shock. I think we all know our portfolios tend to go up over time. We have these big dips. We want to try to make sure, particularly when you’re in retirement, to be a little bit safer, so we don’t have such big valleys. Finally, we’re going to talk about early retirement collisions because we don’t want that. A lot of people are retiring early not because they want to, but because they’re forced to. Joe, I think a lot of people do great planning or they have ideas, but then something happens that they really didn’t think about.
Joe: When you get in your car, you’re not expecting to get in a car accident.
Al: No, that’s right.
Joe: It’s these blind spots that kind of come about and health care is a big one. This is interesting; 67% of people have no idea what healthcare is going to cost them in retirement. 67, almost 70% of you. Here’s another interesting stat: most of you are retiring at age 62. Hey, I’m 62. I’m going to collect my Social Security. I’m going off into the sunset living my glorious days, on the golf course or whatever. Something happens, you get sick. But guess what? Medicare doesn’t come in until age 65, so there’s this gap here. Some people believe once I collect my Social Security, I will receive my Medicare at the same time. That is not necessarily true if you retire early. Medical expenses, Al, when people are, especially at this age, trying to get private insurance is a huge, huge crunch. I guess we’re overall finding
Al: It’s a big number. A couple of things I want to say there. First of all, as people think Medicare covers almost everything but not really. It covers on average about 60%. What folks do is they get supplemental insurance or they have other savings. Just be aware of that. You have this gap period if you do retire 62, 63, 64 or whatever, until Medicare. So, you’ll have to get some private insurance. Here’s the big one, though. Fidelity Investments does this every year. They figure out how much an average retired couple at age 65 is going to spend in medical costs over their lifetime. They came up recently with $300,000. We’ve been in the high 200s. $300,000 is what you’re going to need on average for medical costs. I do want to tell you though, you look at that number and you go, Well, I’m out. I can’t do it. I think a better way to think of it is, for a married couple, 10, 11, 12,000 a year. That’s kind of what you need to think about budgeting for.
Joe: This is the shock factor, right? $300,000 is like, Oh my god, I don’t even have $300,000 saved. How am I going to retire? This is really good, though, to maybe put in your face because it will cost you roughly about $10,000, as Al said. 60% of Medicare is going to cover roughly 60%. You will need a nest egg or some additional cash flow to help with these medical costs. Basically looking at where it’s going, 17% is going to generic drug prescriptions. Other medical expenses, that’s the big one, those could be co-pays. It could be all sorts of different things. Your premiums are another 40%. Understanding what medical costs are going to be. Do you want a Medigap plan? There’s all sorts of different things that you need to take a look at as you approach retirement to make sure that you’re covered there. If you need help with this, of course, go to our website. YourMoneyYourWealth.com. Click on our new guide. This week it’s the retirement blindspot guide. Go to our website. Download it now. The show is called Your Money, Your Wealth®.
Joe: Welcome back to the program. Shows called Your Money, Your Wealth®, Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors with Big Alan Clopine CPA, a.k.a.Ron Burgundy, today very fashionable with the turtleneck. We’re talking blindspots. When it comes to your overall retirement plan, you don’t want to get caught in any of these blind spots. Go to our website at YourMoneyYourWealth.com. Click on that special offer this week. It’s our retirement blindspot guide. Before we get to the next couple, let’s see how you did on the true false question.
Al: If you delay your benefits after turning 65, you should still apply for Medicare within 3 months of your 65th birthday? Joe, True or false?
Joe: I think it’s good practice, too. Let’s say if you’re employed, you have good insurance. You want to keep on that plan. You have to take a deeper dive on what your plan really is. I’ve seen in some circumstances where they want Medicare to be the primary if you’re over age 65 and then the group insurance that you have at your employer would be secondary. It’s good practice if you’re turning 65. You get a ton of mail anyway. Al, You get a lot of mail yet on Medicare?
Al: I’m starting too. That means I’m getting close.
Joe: Just do the planning. It’s good practice. At least you’re in the system. You sign up, you don’t have to pay any premiums until you actually elect.
Al: That is true. Best practices. So 3 months before til 3 months after your 65 birthday. If you don’t do it and you don’t have insurance that qualifies for you to postpone it, you’re going to get penalized. Don’t do it. The penalty is pretty high. I think, Joe, it’s like 10 % the first year and it goes up from there.
Joe: Yeah and same with prescription drugs. That’s why doing the planning ahead of time, understanding, Hey, do you want a Medigap policy? Is there prescription drugs that you’re taking, or anticipate. You want to make sure that you’re signed up for everything ahead of time or understanding how to do it, where to go. Just do your due diligence. It’s vital, it’s really key. I know most of you are pretty aware of this, but for some of you, just little tips of the trade.
Al: We should talk about inflation.
Joe: Remember the 70s? I don’t remember the 70s, but Big Al does. We had double digit inflation, so you could purchase a seat back then, too, for like 20% but your mortgage was 22%. Inflation was sky high back here. Then it tamed right around that 4 or 5 % and then it’s kind of going down. Look at the past several couple decades.
Al: Not so much.
Joe: 2, 2.5 % and now we’ve seen a spike. I think this year it’ll be close to 7 %. On average, these were almost like negative inflation, like almost deflationary years. Over the history since 1970, here on average, it’s right around 3.5%. As you’re doing your financial planning you’re going to live the next 10, 20, 30, 40 years. You want to look at a pretty conservative inflation rate, which could be anywhere from 3.5 to 4%. Some years it’s going to be a lot lower, but some years like this year could be a lot higher.
Al: That’s important and, in a way, we might have got a little bit complacent because inflation hasn’t been that high the last couple of decades. We know historically it’s there. If you look back 100 years, it’s 3.5, 3.7 % something like that. Just be aware of that. I know sometimes when I talk to people about, well, you know, your food, you think of buying a carton of milk. I remember when it was, you know, 50 cents. No, I don’t even know what it is now, it’s like over $2, $3. It could double. So 2%, 3%, 4% over time will double. You just have to plan for that. That’s one of the things that people don’t really think about. They think, OK, I’m living on $6,000 a month or whatever, and that’s all I need. In 25 years, it might be a lot different.
Joe: This year, people really felt the effects of it. A lot of you’ve done like home remodeling projects and things like that. Because of COVID, we’re just stuck at home. Then you’re trying to buy materials or trying to get materials, the supply chains and the costs and everything else. It’s been pretty crazy. You go buy a pound of bacon, it’s like $15. We’re actually feeling it now, which, over the last several years, you probably saw a couple of percent increases. You didn’t necessarily see it but inflation is real. The cost of goods and services will continue to increase. You want to make sure that you’re invested appropriately so you can outpace inflation. That’s why having an investment strategy is so key.
Al: Let’s talk about required minimum distributions because this is confusing for a lot of people. It used to be 70 ½ , now it’s 72. As we film this, there’s been talk about making it 75. That’s not in the current tax bill. But it could come later. Required minimum distribution simply means that you need to take money out of your retirement accounts by age 72. By the way, that starts at about a 4% rate. If you got $100,000 in an IRA, you got to take out about $4,000. A lot of people don’t really understand, as time goes on, your life expectancy goes down, your required minimum distribution goes up. You have less years to pull the money out. And the IRS wants their tax money. They haven’t got tax money on that yet, and I think taxes Joe, is something that a lot of people don’t spend a lot of thought on in retirement.
Joe: When you look at our blind spots, the health care crunch. Then we looked at the impact of inflation. So you’re getting impacted by inflation and now you’re getting T-boned by the tax bill. We’ve gone through this but if you’re unfamiliar with taxes and how your investments are taxed, there’s different ways that you can invest money and they are taxed a little bit differently. You have your standard retirement accounts that are going to be tax deferred. You get a tax break going in. You’re not subject to any type of tax until you pull the dollars out to spend. That’s when you pay ordinary income tax. Tax free is the opposite. You pay a little bit of tax upfront. Your investments grow 100% tax free. You’ll never pay another dime in tax, in those again.
Then you have a taxable account or a capital account. They’re outside of any type of retirement account, any type of tax deferment, but you’re paying taxes as you go. Investments today are extremely tax efficient if you know what you’re doing there. If you have index funds, ETFs and your tax managing this account, the tax drag on these accounts are very minimal. You will be taxed on any type of capital gains so they have growth in the account, but it’s subject to a lower rate. It’s 15% for most of us, it could actually be zero. Understanding where your assets are is going to help you with a tax efficient distribution strategy. If all of your money is in this tax deferred account, you’re only going to be subject to ordinary income tax. The more money you have, guess what, the more money you’re going to be taxed. As Alan said, there’s rules here because there’s RMD’s. If you look 72, here’s your divisor. The divisor goes the other way.
People think I just multiply this so my RMD goes smaller. No, in most cases, depending on the growth of the account it grows. Some of that might push you here. Force dollars out of this account, subject to more and more tax. Don’t get T-boned by the tax man. If you need more help with this, go to our website YourMoneyYourWealth.com. Click on our new guide.
This week it’s the retirement blindspot guide. Go to our website, download it now. Shows called Your Money, Your Wealth®.
Joe: Welcome back to the show. Show is called Your Money, Your Wealth®. Joe Anderson Big Al Clopine talking about retirement blindspots. Making sure that you got your bases covered on your road to retirement. Before we get to the true false. Go to YourMoneyYourWealth.com, click on that guide. It’s our retirement blind spot guide. Go to YourMoneyYourWealth.com. Click on that guide. Get everything you need to know to avoid those nasty blind spots. Hey, let’s see how you did on the true false question.
Al: Housing is typically the biggest expense retirees have after age 75? What do you think, Joe? True or false?
Joe: I don’t know. I mean, I guess it depends on where you live. I would say it’s probably somewhat true.
Al: I think it is, at least according to T. Rowe Price, this is average. Average expenses in retirement at 75 plus, 36% of expenses is housing. It is the biggest expense on average for people over 75.
Joe: We’ve talked about blind spots throughout this program. Health care. There’s always going to be some expenses that are going to come up and kind of hit you. We’ve talked about taxes. We talked about inflation. Another one that is probably less common is called sequence of return risk. That’s basically the luck of the draw when you retire if you don’t have a true retirement income strategy. Markets go up and down. If you retire in a bull market versus a bear market could have significant consequences on your overall retirement. It’s funny most people don’t really realize that this is probably the biggest, you know, I guess, blind spot to keep with the theme that people have in retirement.
Al: Hardly anyone thinks about it or talks about it. We’ve got an example. This is a simple example to show you how this works. We have two different people. Looks like we got Jack and Jill, that’s what I’m going to call them. They both start with $1 million investment. They both have the same rate of return over time, over their full retirement. In Jack’s case, there’s a market downturn for the first 3 years, and in Jill’s case, there’s a market downturn in the last 3 years. They’re taking out $40,000 per year. They’re increasing that 2% per year for their distribution. What happens? Well, look at Jack. Look at his portfolio. It’s gone by 13 years, completely gone. Now, in Jill’s case, she’s still got money 25 years from now. In fact, she’s got more than she started from. Be aware of that. How do you help mitigate that, is by your investments. You don’t want to be all in 100% equities when you’re retiring because you need cash to live off of. Joe, I think some people have been aggressive to get to retirement, that they don’t really realize they need to pull off the gas a little bit.
Joe: I think people use averages in the wrong way. If you can look at a 10 or 20 or 30 year time frame and you average 6%. Al and I could have the same average rate of return over the next 20 years of 6%, but our portfolios could be completely different. Alan’s could be globally diversified. Maybe 60% stocks, 40% bonds. Mine could be 100% stocks. I’m up 60% one year down 30% the next; up 20, down 10. It’s just this crazy, wild ride. I still average 6% over that time period. The problem is, if I’m in a down year and I’m pulling dollars from the overall portfolio, it’s really hard for me to catch back up. That’s why having the right portfolio as you position into retirement is very key. Another blind spot here is that unexpected retirement.
I think a lot of times people plan on retirement at age 60 or 70, but end up retiring a lot earlier.
Al: This is more common than you would think, and it depends upon what study that you’re looking at. But this one that we just put up, this is T. Rowe Price again. What they said is 51% are forced into early retirement between the ages of 61 and 65. We know that from most surveys, the average age people want to retire is age 65. We also know that the average age people retire is 62. In other words, a lot of people are retiring earlier than they had intended. What does that do? Well, now you’re going to be getting into your portfolio quicker, you’re going to be not saving. It’s going to put more stress on that portfolio.
Joe: Good point. If I’m planning on working until 65 or 67, and I retire at 62. That’s a 5 year stretch that I’m not saving into the plan.I’m actually taking money out. It’s a reverse effect. I’m going to have to have that money last that much longer because I retired that much earlier, depending on, of course, life expectancy. If I’m taking Social Security, I’m taking it earlier. It has a pretty big effect, even though it’s 5 years that could have on your overall retirement income strategy. If you look at the trends this year Alan, it looked like a little bit of a spike. Maybe Mr. Covid had something to do with that.
Al: A little bit of a spike, Joe. Look at this. This is Baby Boomers from 2012 to 2020, the biggest year was 2020, just the last year. Why? Probably because of COVID. People got laid off, people got furloughed, whatever happened, but a lot of people retired that probably weren’t expecting to. This is why we’re talking to you. Have a plan if you end up retiring earlier than you intended because it’s more common than you might think.
Joe: Let’s switch gears here. Let’s go to ask the experts.
Al: This is from Sylvia in Kensington. “I’m retiring earlier than I planned. Is it better to pay off my house to give us additional cash flow each month or cash in some stocks?” What do you think, Joe?
Joe: That’s a great question. I don’t know the answer to that, but I can give you some ideas I guess. It depends on how big the mortgage is first of all. Let’s say your mortgage is $2,000 a month. You pay off the mortgage, and then that’s going to free up $2,000 a month that you don’t have to either create the income for the portfolio or that you can take the $2,000 a month and you could spend that somewhere else. If you’re going to liquidate a big portion of your liquid assets to pay off the mortgage, I would reconsider that notion. I would probably at that point refinance my house and take it out another 30 or 40 years as long as I could, to shrink my payment so it helps cash flow wise. What we’ve seen is that when people throw on a lot of their liquid assets towards their mortgage. Their mortgage is paid off, but they have no cash to live off of.
Al: There’s really a couple of things that you have to be careful of here. Number one is; you hear the term that you’re house rich and cash poor. That’s not a good recipe for a good retirement.
You need to have cash reserves and investments to be able to live. If you can lower that mortgage by maybe refinancing to a longer term, that might be better. Here’s another problem, though, and that is that a lot of people’s investments are in their retirement account. If you’ve got to pull $300,000 out to pay for your mortgage, you’ve got to pull another $150,000 or whatever the number is to pay your taxes. Now you’ve got to pay taxes on $450,000, not $300,000. Now you’ve got to take out $475,000 and it’s one of those circular things.
Joe: We see this, hey, I got a $300,000 mortgage. I took it out on my retirement account and I paid off my mortgage. The next year, they get a tax bill of like $150,000. They’re like, Where do I get this money from? Let’s go back to the retirement account to pull out $150,000 to pay the tax man. They pull out another $150,000 to pay the tax, and next year they get another tax bill because they pulled $150,000 to pay the tax, to pay the tax, to pay the tax! Be careful of what you’re doing. You could blow yourself up. Let’s go to the next one.
Al: “Is there any way around the early withdrawal rules if I lose my job?” This from Cameron in Point Loma. There’s all kinds of rules, we only have time to hit on a couple. One is that 10% penalty, that doesn’t apply if you retire at 55 years of age with your current 401(k). You can pull money out. You pay tax on it, of course, but you don’t have the penalty. 59 ½ is the normal rule for IRAs. But Joe, there’s hardship withdrawals from 401(k)s. There’s different exceptions on IRAS. Whether it’s medical. Whether it’s college. Whether it’s buying a home. There’s all kinds of exceptions.
Joe: There’s something that’s called a 72(t) tax election as well that would avoid the 10% penalty. You still have to pay taxes on it. Dipping into the retirement accounts prior to 55 or 59½ is probably the last resort. There’s always ways around the penalties if you just follow the guidelines.
What did we learn today? There’s blind spots in everything and especially your overall retirement plan. We talked about avoiding that healthcare crunch. Looking at taxes in that tax T-Bone and then looking at portfolio shock. That sequence of return is key. Making sure you have a strategy if markets go up, you know where you’re pulling your income from. If markets are down, you know where you’re pulling your income from. Then making sure that your budget is satisfied if you’re forced into an overall early retirement. You never know what’s going to happen. Start now, start planning today. These blind spots come from every direction. You want to make sure that you are prepared when they arrive. Go to our website at YourMoneyYourWealth.com. Click on YourMoneyYourWealth.com to get that special offer this week. It’s our retirement blind spot guide. Say that 10 times in a row. That’s it for us for Big Al Clopine, CPA. I’m Joe Anderson,CFP®. Have a wonderful weekend, everyone.
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.
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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.
