Half of Americans admit they have zero retirement preparedness. Most don’t even have real income plans. Joe Anderson, CFP® and Big Al Clopine, CPA walk through actual cash flow projections, market loss recovery strategies that don’t blow up your timeline, and the Medicare enrollment and Social Security calls that can make or break your plan. Retirement planning doesn’t have to be this complicated. Grab your list. It’s time to check some boxes.
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Your Retirement Checklist:
- Cash flow
- Spending
- Sequence of returns risk
- RMDs/Roth
- Savings
- Social Security
- Medicare
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Transcript:
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Joe: All right, folks, we’re gonna check some boxes today. Are you prepared for retirement? When you go to the grocery store, what do you bring? You bring a list, and you check off what you buy. But most people don’t do the same for probably the one of the biggest decisions that they’ll ever make in their life, is leaving the workforce and jumping into retirement. You’ve gotta get your checklist. That’s what we’re gonna do today.
Joe: Welcome to the show, folks. Show’s called Your Money, Your Wealth. Joe Anderson here, president of Pure Financial Advisors. I’m with Big Al Clopine, sitting right over here. Hi, Big Al.
Al: How you doing?
Joe: You got your checklist ready?
Al: You know, as a former accountant, I love checklists.
Joe: You gotta check the boxes. One, two, three, four.
Yeah. You gotta check the boxes. But sometimes people don’t know what boxes to check, so we’re gonna share that with you right now. That’s today’s Financial Focus.
All right, here’s a scary stat. Half of people don’t expect to be financially prepared as they approach retirement. We already know that we’re not gonna be prepared financially, but we don’t wanna do the work because we don’t wanna see the results in most cases. It’s not gonna be that scary. All we gotta do is check some boxes. Let’s bring in Big Al, and he’ll check ’em for us.
How to Build a Retirement Income Plan That Actually Holds Up
Al: All right, love it. Retirement checklist. we’re gonna start with the basics. Cash flow. What is cash flow? Cash flow is looking at all your income streams and subtract your expenses. Also, check your taxes, because if you can reduce your taxes along the way, gonna make your money last a lot longer.
And now, finally, Joe, action plan. That’s the most important thing. Once you know what you have, come up with a plan.
Joe: Yeah, I think retirement planning is this easy. All right? At least to get it on paper Understand your cash flow. What is gonna come in from an income perspective? What are you gonna pay tax on the income and the additional cash flow that you need?
Once you figure that out, then that’s when you can create an investment action plan that can solve all of these. When it comes to spending, however, two-thirds of people have no idea what they’re spending.
Al: I think two-thirds or more don’t even have a budget. So that’s where you start, is your spending.
And if you don’t know what you’re spending, at least then look at your net pay, and if there’s n- nothing left over, then that’s probably what you’re spending.
Joe: You wanna be honest and do some real mapping here. Or just use the 80% rule. That could be your baseline. It could be higher or lower than that, but I think this is a good baseline.
What is your income today? Maybe cut that by 80%. Be careful of this. A lot of people overspend early in retirement. You’re young, you wanna do different things, right? You’re out and about in the real world. Let’s do travel. Let’s buy the RV. Let’s do this. A lot of people overspend, and then that lifestyle creep.
Al: It comes in for all of us. I mean, we make a little bit more income. We spend a little bit more money. It feels good. When we retire, we want to be at that income level, and sometimes that’s not always sustainable. We want it to be, but you gotta map all this out to figure out whether you’re gonna be on track or not for your spending.
And, Joe, I think, you look at the number of people that have a written financial plan, it’s only, like, 47%.
Joe: S- so your spending is one, but then your income is the other, right? So it’s like, I know what my income could be, but still 47% of people have no idea where their income is gonna come into.
Finding Your Retirement Cash Flow Shortfall
So let’s look at a cash flow shortfall on how to create the income from your liquid portfolio. Retirement spending wants to be $100,000 a year. You look at your 401, I have a million dollars saved. What is your fixed income sources? Let’s say this couple has $50,000 coming in. if I wanna spend 100, I know I can count on 50.
My shortfall here is 50,000. It’s as easy as that. How much money would you like to spend? What is your income sources going to be? Find out what your shortfall is. Don’t confuse, all right, I think I’m going to get this in dividends and interest, and I have this, that,” whatever. I think your fixed income is what’s fixed.
Social Security, pension, or reliable income that you know. So if you have, let’s say, real estate income, you have tenants that pay you every single month, that could be fixed income as well. Interest and dividends might be a little volatile, might change a little bit. In most cases, I don’t count it, but if you wanna count that in your number, go ahead.
But take those dollars out to find the shortfall. I wanna know what the shortfall is, so that’s gonna tell me the demand from that portfolio.
Why a 6% Return Every Year Is a Fantasy (and What Sequence of Returns Risk Really Means)
Al: Yeah, and the next step, you divide that shortfall, 50,000, into a million dollars. That’s a 5% distribution rate. So let’s look at a scenario how that might work out.
You retire at 65 with a million dollars. In this example, you can see the assets are going down and they run out by age 91. This is based upon a 6% rate of return, 3% inflation, 2% cost of living, 12% tax bracket. So those are the assumptions we’re using. But this is if you have an even rate of return over that whole period of time, which never happens, right?
In a lot of cases, people retire and the market collapses. That’s trouble, right? That- that’s sequence of returns risk. In other cases, the market zooms, so you’re in a great position. Maybe you can spend a little bit more. But Joe, I- I like this graph, but it’s not real life because nothing happens exactly like that.
Joe: There’s very little guarantees that we can say in the financial planning business, and I can guarantee one thing, that this would never happen. This is just- this would never, ever happen because we’re assuming… Unless you have a 6% fixed rate of re- like, a s- 6% CD for life.
Al: Yeah, for life.
Joe: I’ve never seen that product.
Al: No.
Joe: So this is saying 6%, even 6%. You’re just kinda cruising along. But the market, does this. So in some cases, you could run out of money here. In some cases, you might have all of this extra cash, still spending the same. It all really depends on the sequence of returns. This will be a good gauge.
That’s why I think sometimes financial planning calculators, financial planning tools, financial planning whatever, when you’re look- It’s a process. You have to, live and breathe it. It’s not like, let’s punch in some numbers. Okay, we’re good, honey. I don’t think I’m gonna make it to 91, so let’s pull the plug and retire, right?
You wanna make sure that you’re looking at this ongoing because the markets, taxes, things change all the time, and you wanna make sure that you adapt with it.
Al: But then also consider inflation. A lot of people forget inflation. So you retire at 65. You want $100,000 a year. You go 30 years at 3% to 95, it’s almost $250,000.
When we were children, we had things that were a lot cheaper, bottle of milk or whatever, a lot cheaper.
Joe: We can help you with this. Go to YourMoneyYourWealth.com. Click on that special offer. It’s the famous Retirement Readiness Guide. Are you ready for retirement? Have you checked all of the boxes? Do you even know what boxes to check?
We’ll help you with that. Go to YourMoneyYourWealth.com. Click on the special offer. It’s our Retirement Readiness Guide. We gotta take a break. When we get back, we’re gonna check more boxes to get you that much more prepared for your pending retirement. We’ll be right back.
Joe: Hey, folks. Welcome back to Your Money, Your Wealth, Joe Anderson, Big Al. We’re checking boxes today, your retirement readiness checklist. Go to our website, YourMoneyYourWealth.com. Click on our retirement readiness guide. It’s gonna give you the checklist that you need to make sure that you’re ready to retire. Let’s see how you did on that true/false question.
Al: Over 80% of investors 55 to 64 express fear that a major market downturn would significantly reduce their assets. Boy, you know, a lot of us are fearful of what the market does, and we’re fearful because we’ve lived through the Great Recession and the dot-com bust and other things. So I gotta say that’s probably true.
Joe: 82%, Big Al. Almost 100%. Almost 100. We should just call it 100%. Yeah. I don’t know. Like, who, who’s the 18% – Who, who- … that are like, “I don’t care”
Al: Who wouldn’t be afraid. Yeah, whatever. I’ll just readjust my lifestyle.
Joe: No big deal. There’s a trailer out back. I don’t know. I got a mattress in a tent. No, no biggie.
Yeah, that’s why you need a strategy.
The Market Loss Recovery Math That Could Save Your Retirement
Here’s another thing that a lot of people get confused on. It’s the math of investing. All right. Say, let’s say you have $100,000 and you lose 20% this year. Next year, you gain 20%. So you lose 20, you gain 20. A lot of times, it’s like, okay, that’s good, right? The market came back.
the market was down 20%, but it was up 20%. My $100,000 should be back to $100,000. Guess what? It is not. Let me explain the math. $100,000, you start. You lose 20% decline. 100,000 minus 20%. Now you have $80,000 sitting in your retirement account. 80 grand. Now, the market goes up 20%. 20% on 80,000 is not 100. 20% on 80,000 is $16,000. You need 20. I’m still $4,000 short. So I need a 25% rate of return just to get my principal back. If I’m taking dollars from the portfolio, it’s gonna take me that much more to recover. So when you think about a retirement income strategy, as you’re pulling dollars out of the account, you have to look at sequence of return risk and what a downturn could do to your overall strategy because not only do you have to get a 25 to get your principal back, you’re gonna have to gain a lot more to get your principal back if you’re taking money from it.
Why a 20% Loss Needs a 25% Gain to Break Even
Al: Yeah, and I think that’s the key because now you’re in distribution mode and you’re taking money out. So because of that, what do you do? How do you solve for that? you don’t have all of your money in the market. Even though the market does better over the long term than other asset classes, when you’re taking money out and the market declines and you’re pulling money out of the market, it’s much harder to recover.
So what you need, to have some short-term money, maybe cash, CDs, that sort of thing, to cover expenses, maybe very safe bonds, some mid-term, assets, intermediate, maybe, you know, a little bit higher interest rate bonds or some things like that. And then finally, your growth. That’s a longer-term asset class.
That’s what’s gonna help you with inflation down the road. But at a, moment in time when the market goes down, it’s, you don’t want all your money in the market.
Joe: Yeah. Market goes down, I grab from here. Market goes up, maybe I grab from here. So there’s all sorts of different ways to slice and dice this because it’s your specific situation.
It’s what you’re trying to accomplish. But just think about if I have all of my money more in long-term growth because, hey, I have a 20, 30, 40-year retirement time horizon. Yeah, you still wanna have a lot of money here, but maybe not 100% if you need distributions from the overall account. Now, let’s say that you have dollars in your retirement account.
What happens? You have an RMD. So from a tax perspective, Al, there’s things that you gotta consider all the way through.
RMDs, Higher Tax Brackets, and the Case for Roth Conversions
Al: You do, and I think this is our same example from the first one. So they’re now are a couple that’s 75 years old. They started with a million. They’ve got 968,000. By age 75, they have to take money out of their IRA, 401.
It’s a required minimum distribution. It’s actually 73 currently for those born before 1960. But 1960 and later, in terms of your birthdate, it’s age 75. That means you have to take money out of your retirement accounts whether y- you want to or not, which also means then, Joe, you gotta pay taxes on that.
Joe: That could kick me up into a higher tax bracket. So the dollars that are forced out of my retirement account might push me up in, let’s say, the 22 or the 24% tax bracket when I coulda got that money out at a lower rate Provisional income hike and then extra IRMA also could happen with this RMD
Al: they do, which basically means that if you- with the provisional income, you might have to pay more taxes on your Social Security than you otherwise would.
And then the extra IRMA has to do with your Medicare premiums. They could be higher as well. So one of the solutions for this is to consider Roth conversions. Go back to that same example where the couple ran out of money at age 91. Had they done some Roth conversions timely and stayed in the 12% bracket, had- if they’d done up to, say, $250,000, then they actually could have increased their money.
Their money would’ve lasted until age 94, 95, and had they done a little bit more, it could last even longer.
Joe: I could stretch the dollars out, and some people are thinking, “How, is that possible?” because I’m slowly chipping away at this retirement account, and I’m putting it into a tax-free environment, that tax-free environment that is compounding, growing as well.
When I pull dollars from that at a later date, I’m not paying any tax on that at all. I’m pre-paying the tax, and I’m giving it some time to run. Here’s an example. The top of the 12% tax bracket on the marginal level is $100,800. I have a standard deduction of $32,200. $108,000, I add in $32,200. That gets me to the 133.
That’s the bogey. I have a 401withdrawal of 40- $56,800, and my taxable Social Security is $42,500. So if I add these two up and I subtract the 133, I still have room in that 12% tax bracket of $33,700. This 33,700 would be the number that I would wanna convert to stay on the top of the 12% bracket. Roth conversions can get tricky.
They can get complicated, so you wanna make sure that you do the math. This is pretty confusing for me, and I’ve been a certified financial planner for a long time. I’ve been in this business 25-plus years. But you wanna understand, am I married? Am I single? Then I look at the federal tax brackets. Do I wanna convert to the 12, the 22?
Do I wanna go higher, the 24 even? Look at what that cap is. If I have the standard or itemize, add those two together to see what that top is. Then you have to add up your income sources. Are you taking 401distributions? How much are you pulling out from there? What is my Social Security? It’s not your full Social Security because you have provisional income and some of it is tax-free.
Do I have real estate income? Do I have a pension? All of those need to be combined to see what rate that you fall to determine if a Roth conversion makes sense at whatever bracket.
Al: Yeah, and I think it’s worth repeating. So let’s say you do a Roth conversion of 34,000. So you overextended by $300.
22% br- I gotta pay 22% bracket now? Just on that $300 only that you went over. All the rest will be taxed at 12%. So if you overshoot just a little bit, don’t worry about it.
Joe: Clear as mud. If you want more help, go to YourMoneyYourWealth.com, click on our special offer. It’s our Retirement Readiness Guide. Are you ready for retirement?
Get the guide. It can help you out. It’ll walk you through all the things that we’re going through today and more. And when we get back, we’re gonna talk about action steps on how to get that need a little bit more closer to a successful retirement. Don’t go anywhere. You don’t wanna miss this.
Joe: welcome back to the show, Your Money Your Wealth®. Joe Anderson and Big Al. We’re talking about your retirement checklist. You’ve gotta check the boxes to make sure that you have that successful retirement. Of course, if you need help, go to YourMoneyYourWealth.com, click on the special offer. It’s our Retirement Readiness Guide.
Are you ready for retirement? Get ready with our guide. YourMoneyYourWealth.com, click on the special offer this week. It’s our Retirement Readiness Guide. Free of charge, download it right there in the comfort of your own home and get ready for that retirement. Now, let’s see the true false.
Al: Workers age 60 to 63 can make a super catch-up contribution of up to $10,000.
That sounds really nice and in fact, it’s more than 10,000, so I guess we’ll call that false. Did you know right now if you’re between the ages of 60 and 63, in addition to your normal 401contribution, you can make an additional one of 11,250. If you’re a little bit behind in your 60s, then that’s a great way, Joe, to catch up.
Joe: This is a huge opportunity for those of you that are getting really close to retirement where you can sock more dollars. If you’re a little bit behind in savings, you’re like, “Man, I’m just looking for another account to put some savings in,” it’s the super catch-up, 11,250.
Your Retirement Action Plan: Saving, Social Security, and Medicare
Joe: All right. Let’s get into some action steps. Real simple. Save more.
Al: Okay. Check. We’re done.
Joe: That’s it. Check that box, Al. But here’s the deal. If I can save an extra $2,000 a month over the five-year time period and I get a 6% rate of return, it’s $140,000. It’s real money. Hey, I have five years to retirement. I’m 60, I’m gonna be 65 here in five years. I would like to hang it up.
Man, if I can save a couple extra hundred dollars, out of my paycheck or a few thousand dollars extra
a month, doesn’t have to be 2,000, it could be 5,000, it could be 200, it doesn’t matter. If you could save a little bit more money, of course, this thing adds up quite a bit.
Al: Yeah, and Joe, the next thing is considering your budget. let’s talk about that action plan. Consider your real needs versus wants versus wishes.
Needs are what you have to have, right? That’s your housing payment, that’s your utilities, that’s your food, transportation. What do you want? Probably you want a new clothes, right? You want a new car, right? What are your wishes? Oh, I wanna do that around-the-world trip. Just make sure you get them in the right categories.
Make sure when you do your planning that you’ve got your needs covered at least, and hopefully there’s extra for your wants and wishes. Don’t forget inflation. And we usually recommend people plan this out to age 95 or longer because we are living longer. In fact, the average 65-year-old couple, at least one of you is going to make it to age 92, so planning is, in retirement, it’s a long-term process.
Joe: Then you have to think about how do you wanna invest the dollars that you’re saving more, you’re spending less, you have some extra ca- cash, and plus you have your nest egg. I wanna be super conservative. I wanna stay in cash. Maybe I just wanna buy CDs or a high-yield savings account. That’s fine. You’re not gonna lose a lot of money to volatility or, stocks or bonds that are gonna move up or down, but inflation might get you, right?
Or you might not have enough return in those dollars over the next three, five, 10, 15 years to get you to your goals. But understand the pros and cons. If you wanna stay conservative, that’s fine. Just understand your risk. Hey, I’m behind. I wanna be really aggressive with my dollars. then you have to stomach volatility.
Volatility is not loss. It’s just up and down of the overall account balance. The loss happens when you freak out and you sell, right? So if I wanna be very aggressive, there is no free lunch, right? You might have loss of sleep. You might get really stressful looking at your accounts if the market is moving up and down.
So if I wanna stay, aggressive because I want a 10% rate of return, that 10% doesn’t come free, right? There’s a lot of volatility to try to get that higher rate of return. The best is probably maybe a little bit more balanced approach. That’s where you’re diversified based on your goals, what you’re trying to accomplish, how much you want conservative, how much you want aggressive, right?
Maybe a little bit of both to get you balanced, get you diversified there all the way home.
When to Claim Social Security (and Why the Decision Sticks for Life)
Al: Let’s talk about Social Security. You can take it as early as age 62 or as late as age 70 or anywhere in between. And for some of you, 62 is probably the right age, and others, 70 or whatever. But just realize the decision you’re making lasts the rest of your life.
So at 67, that’s full retirement age, you get your, full retirement benefit. If you take it at 62, you’ve got a 30% reduction. You’re getting 70% of that. If you take it at 70, you get 124%. Let’s put that into numbers. What if your benefit’s a couple thousand dollars a month? If you ta- at, full retirement age, 62, it’s like 1,400, and 70, it’s close to $2,500. That’s a big difference, Joe.
Joe: Yeah. S- here’s another thing to consider People see these numbers and they feel that’s the only time that they can claim, right? When I turn 62, I can claim knowing that I’m only gonna receive 70% of the benefit or a 30% haircut. this is the starting point to claim on your own benefit, not a spousal or a survivor, your own retirement benefit based on your record.
So age 62. I could claim at age 62 in one month, age 62 in two months, age si- right? So 62 to age 70, you could claim it at any time in that period. You claim it, you can actually then say, “You know what? I don’t want this.” Then you can shut it off. So just know that it’s like once you take it, you still have some optionality.
However, I would wanna make sure, if I were you, to do a little bit of planning. What’s gonna make the most sense for you and your family?
Medicare Enrollment and Finding Purpose After You Retire
Al: Now, you also gotta figure out Medicare, right? When do you claim that? That’s, for most people, that’s age 65. If you’re working and covered on your employer’s policy, you can delay it a little bit, but not only when to claim it but what coverage you select and how much in premiums.
There’s supplemental. There’s part A, B, and D. Then there’s part C, which is completely separate.
Joe: Then finally, what are you gonna do? This is probably the most important, right? You still wanna make sure that you have purpose. When we work for f- 40 years, that’s your identity, the people you like, y- you hang out with, your friends, your, colleagues, the ones that you confide in.
A lot of those individuals are the people that you work with Once you retire, a lot of those relationships go away. So you wanna make sure that you understand what is that lifestyle, what is your purpose gonna be, who are you gonna hang out with, and get into a schedule, right? When we’re working, we get up, we might go work out, or we go for a walk, or we eat breakfast with the kids and the family.
Then you go off to work, and then you come back, and then you have dinner, blah, blah, blah. Once you’re retired, it’s like, wow, where’s my schedule? I don’t really have any place to be. I think this is really important. For people that are rigid in their workdays, it- re- retirement comes, you still wanna make sure that you have this schedule.
I’m pretty rigid, Al. I get up at the same time, I have my routine. This is going to be super important- Well- … for me …
Al: it is. And I’m, as you know, I’m semi-retired, and I’ve got a routine. You kinda have to have a routine. And that doesn’t mean you set the alarm for 6:40 every day, or whatever time that you’re setting it right now.
It just means you gotta have a reason to get up. Maybe you volunteer, maybe you watch the grandkids, maybe you play golf. May- whatever it is for you, you have a routine and you kinda stick with it. And of course, another thing is fitness. You probably have more time, right? And why not go to the gym more, or walk more, or do more push-ups, or whatever it is for you to get outside or to get into a gym and start to concentrate more on your health.
Joe: But I think if you have this, the routine, if you lose a routine, I think fitness goes out the window, right? Then you’re the couch potato that you never were, right? But fitness, it doesn’t have to be, like, lifting 400 pounds, right? You just walk around the block, you know, get the blood pumping. Social interactions.
People lose this. People lose that social connection. This is absolutely important. Make sure that you have those connections with family, but also with friends, right? And then intellectual growth. continue to read.
Al: Yeah, read, learn a foreign language.
Joe: There you go.
Al: Play a musical instrument, whatever.
Joe: We’re just checking a few boxes here, a lot more boxes to check. If you need more help, go to YourMoneyYourWealth.com, click on that special offer. It’s our Retirement Readiness Guide. Are you sure you’re ready for retirement? Get the guide, our Retirement Readiness Guide. That will get you ready. Hopefully you enjoyed the show, folks. For Big Al Clopine, I’m Joe Anderson. we’ll see you next time. Thanks for joining.
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• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
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• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
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• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
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