What is the one thing you can’t borrow money to fund? Not a house, not your kid’s college, but your retirement. Do you know if you could retire today if you had to or does your retirement plan need a reality check? From your working years to retirement, financial professionals Joe Anderson and Alan Clopine walk you through critical questions to make sure you are meeting your savings and investment goals.
(0:00) – Intro
(1:19) – Financial Focus
(2:11) – Retirement Reality Check
(3:00) – Savings Goal
(3:50) – Inflation Buffer
(4:50) – Shortfall
(8:50) – Advice to Younger Self
(11:11) – Risk and Allocation
(13:20) – Medicare Options
(15:16) – Early Retirement
(16:48) – Can I Afford to Retire?
(20:09) – Withdrawal Rate
(21:44) – Ask the Experts
(23:59) – Pure Takeaway
Joe: The financial planning strategies you employ at 40 probably need to change when you turn 60 and probably needs to change when you turn 80. You Need to have a reality check of what your overall strategy is. Do you know yours? Stick around. We will help you out today.
The show is called Your Money, Your Wealth®. Joe Anderson here. I’m A CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors, and, of course, we got the big man. There’s Big Al Clopine, hanging out. We’re talking about reality checks. Here’s some scary things: it’s like going to the doctor, right? When you go to the doctor, no one really likes to go to the doctor, but then you get your results back and they’re all great and you feel wonderful. Or if there’s some things on the report, you know, “hey, we got to change some things” or maybe you don’t. But Here’s the problem: 40% of you said, “it will be a miracle if I retire.” 40%! It’s like, “oh, my gosh, I’m just gonna give up.” They don’t even have a strategy in place. 42%, it’s like “I don’t even think about it.” [laughs] “I don’t care,” right? I don’t know what people are doing here, but 42% of people don’t even think about it. They’re just gonna go with the flow. Don’t be one of those people. Let’s get a reality check today and get you going. That’s today’s financial focus. When you look here, half of people, when people are changing their overall investment strategy, or more or less financial planning strategies, almost half don’t change at all. That’s good news and bad news. Sometimes, if you don’t change anything, if you have the right strategy in place, that could be the best move. 10% of people Are changing almost annually. You don’t necessarily want to be there. You have to find your sweet spot. Some of you want to change or need to tweak or change your overall plan. Let’s figure out how. Let’s bring in Big Al Clopine.
Al: So there’s different things you need to think about in each stage of life, so we’ll kinda boil this down for you on today’s show. So let’s start about what you need to think about in your working years, what changes do you need to make, and then what happens when you get closer to retirement– called the retirement red zone, you’re getting close to retirement–and then how should you change when you’re in retirement? And, Joe, this is gonna be, I think, a great show because it encompasses the whole range of planning that you need to do at each stage of life.
Joe: Where do people get advice? I think we talked about this a couple of weeks ago, is that people go to friends and family. So if I’m in my working years, and I’m going to someone that is currently retired to say, “what Is your overall strategy?” or “what made you successful?” Might not necessarily apply to you. So let’s go to the basics Here. First things first, right? Set a savings goal. Inflation is a hot topic now. What does it really mean? And then really estimate how big of a nest egg that you need, and then you can start evaluating your risk or what that portfolio looks like. Alan, I think people look at this first.
Al: I think so, too. In fact, I think that’s most common because we’ll talk to people that say, “well, what should I be invested in?” [chuckles] and the answer is it depends upon where you are at your life, what your savings goals are, when you want to retire, what kind of lifestyle that you want. You got to figure out all these things first, you got to factor inflation, things Like that, then you can figure out what the investment should be, so I think you’re right, Joe. People get that backwards.
Joe: Right, because this is sexy in a sense. It’s like “well, show me the money,” right? Well, should I buy Tesla, Netflix? Oh, what’s going on with bitcoin, you know? I get the intrigue-ness of people wanting to look at watching their assets grow, but let’s get boring first and then we can talk about it. Inflation is key. For all of you in your 30s, 40s, 50s, even 60s, right, depending on your overall life expectancy, you have to understand that the dollar, or the cost of goods and services, are going to increase, or the purchasing power of your dollar will decrease over time, depending on what inflation does. So let’s just assume a 3% Inflation rate. Today, hundred dollars, you’ll buy a hundred dollars’ worth of goods. Ten years from now, that $100 today will only buy $74 worth of goods and services, or you’ll need $134. Twenty years from now, it almost doubles, right? So that’s why you need to grow your assets, just because if I have all my money in cash, I’m losing money. I’m just losing money safely, right? I can’t really see it, there’s no volatility, but inflation is eroding the overall dollar.
Al: Well, it is, and I think that is a key point that people forget. And, Joe, let’s go over an example. Let’s say you’re a 40-year-old and you’re currently working and you’re spending $80,000 at this point, and then we got to factor in some retirement. If you retire at age 65, 3% inflation rate, that means you’re gonna need $168,000 of income to have that same lifestyle in retirement, all right? So then you want to take a look at “what is my fixed Income gonna be?” You look at Social Security, you index that for inflation or cost of living, what your pensions may be. So, in this example, $82,000 Is your fixed income, so you need $86,000 from your portfolio, and so then, Joe, then you can go to work and figure out how much you need in a portfolio.
Joe: Right, absolutely, because $80,000–if you’re using this number, right, and not indexing that for future dollars, you’re gonna get in trouble because It’s $80,000. “Oh, look at my Social Security. It’s gonna be $82,000. I’m good.” well, no. That $80,000, right, increases. It’s gonna be $168,000 is what– The same lifestyle, if you want to maintain that lifestyle. So now the shortfall’s $86,000. How much money do you need as a nest egg? Well, we look at the good, old rule of 7–or the 4% rule, not the rule of 72. So when you Look at your shortfall, a really easy math equation to do is just multiply it by 25. So you got $86,000 times 25. You’ll need About 2 million bucks, right? Your current savings is $300,000, so how much do you need to save on a monthly basis? It’s about $1,200 a month, to get to this number. So it’s setting goals in place, figuring out what you need to do, and then you can start building your plan.
Al: Right, and that’s based upon a 6% rate of return, so now, when you know that, then you can go to your investments. How should I be invested? And I’ll give you a little hint. When you’re younger, and if you have many years before you retire, you want to be a little bit more aggressive, you want to have more money in the stock market. This is just like a quick rule of thumb, but, in your 40s, maybe you want 80%, you know, maybe 70%, Maybe even 100% in stocks. It Just depends, right? When you’re in your 50s, maybe you tone it down a little bit. Of course, you can’t really use this as gospel because there’s a lot of factors that can affect how you should invest, but, Joe, again, we’re talking about figuring out your financial plan first, and then you can figure out what the investment should be.
Joe: Right, yeah, absolutely. And then just rules of thumb again, you know, just to see if you’re on track. Are there things that you need to tweak? This is a reality check, right? Unfortunately, let’s say you’re in that 40 zone. You need to have two times your annual Income, so, in this example, Let’s say they have an $80,000 income, but they, at $300,000 saved at 40, that’s pretty good, right? Now you’re 50. You need 6 times your income. You know, this is a really good rule of thumb. It’s not gospel by any Stretch of the imagination, but at least gives you the checkup that you probably need to make sure, “hey, do I have to tweak things, do I got to save more, or maybe I can retire a little bit sooner?” If you need help with any of this, go to our Website, YourMoneyYourWealth.com. Special offer this week is our Retirement Reality checklist. We’ll be back in just a second. Shows called Your Money, Your Wealth®
Joe: Hey, welcome back to the show. The show is called Your Money, Your Wealth®. Joe Anderson here with Big Al Clopine. We’re giving you the reality check that you need to make sure that you have a successful retirement. You need to pivot, make sure that you have the right strategy. Are you on the right track? Before we continue with that, let’s see how you did on the true/false question.
Al: “Surveyed retired investors say the top advice they would tell their younger self: ‘don’t go into personal debt for your kids.'” true or false? Wow. That seems false. What do you think, Joe?
Joe, chuckling: I don’t…
Joe: Well, I don’t know, Al. Are you going into some debt with your kids?
Al: We talked to a lot of retirees, and that doesn’t seem to be their major concern.
Joe: No, number-one is always, you know, if you could go back in time, what would you probably do? All of us would probably save a couple of extra Bucks, all right? So if you’re in your 60s and you can’t go back to your 30s, you know, there’s a lot of different things you would probably do, but maybe put another few dollars away for retirement is Probably number-one here. Invest early in life, start saving earlier or investing, maybe earn cash, maybe get in a little bit more sophisticated investments. 30%, Al.
Al: Yeah, 30%, debt, yeah.
Joe: That’s you.
Al: And no, I did not go into debt for my kids. [Joe chuckles]
Al: But I do think it’s important. I think that–I think Starting to save earlier, and This happens to a lot of us, right? We graduate from college; we’re trying to pay off the student loan, you know, we got our place, we get furniture, TVs, whatever, then we get married and then we have kids. Then it’s like we’re 40 and we haven’t done anything, right? So starting early is actually one of the best ways to make sure You can retire successfully.
Joe: Yeah. I guess, if you have kids, pass that along. Let’s go back to reality check. So now We’re reaching retirement. Maybe you’re a couple of years from retirement. What are the things that you got to check off the List? Well, review your budget and savings goal. I can’t tell You how many times someone goes into retirement, and they have no clue what they’re spending, all right? You want to dial this in a little bit. No one wants to be put on a budget. I get that, but you want to make sure that you’re in the same ballpark of what you’re spending, all right? Then you got to re-evaluate your risk. Is your portfolio now positioned appropriately to create income versus toward purely growth? And then we’re Looking at Social Security’s right around the corner and then your Medicare options. So looking here at risk, al, as people approach retirement, you know, this is, again, a rule of thumb, but you want to make sure That you kind of probably tone this thing down as you’re taking income.
Al: Well, you do, as you get closer, so–and the reason is because, like, let’s say you’re gonna retire in a couple years, And if you got all your money in stocks or most of your money in the stock market, what happens If there’s a big correction like we had during the great Recession, where the stock market went down 50%? What if that’s you, you’re all in the stock market, and then you retire, and then you’re withdrawing from those accounts while the market is down? That’s the danger, right? So as you get closer to retirement, make sure you have enough safety in there because you won’t–in case the market does go down, you’ve got a safety net to withdraw from.
Joe: Yeah, I mean, if you keep the money in stocks, that’s great. You’re gonna see higher growth over a long period of time, but it’s called reverse dollar cost averaging. If the market’s down 50%, you need 100% rate of return just to get your money back, just to get square one–you know, just to get even, your basis back. But if you’re down 50% and now pulling money from the portfolio as well to live off of, it’s gonna take you that much more to get your money back. Another mistake people make that you got to get dialed in on is your Social Security claiming strategy.
Al: You do, and so the first age you can claim is age 62, which, believe it or not, is when more people than not claim their Social Security. But what happens when you do? You get a lot lower amount for life, and so, in this example, somebody that’s 62 that could receive $1,400, if they wait till full retirement age, which is right, at this point, 66 1/2, they could get about $2,000. If they wait till age 70, they could get $2,480 per month for life, right? And this is important, especially if you’re married and if you have the better benefit. If you wait till 70, if you pass away, your spouse takes over that same benefit, so think about this when you do and realize it’s not every year’s decision. Every single month, you can make a decision to claim It or not. Every single month you wait, the benefit becomes higher.
Joe: Yeah, and I think a lot of you’ve heard, you know, claim it at 70 because look at the big Increase, right? You get a thousand-dollar increase. I think it’s, what, 77% more benefit, in a sense, right? So advisors really like this number because you’re guaranteeing yourself a lot larger guaranteed Income for the rest of your Life. But most of you are still claiming here because you might Look at it a little bit differently: “hey, I have $1,400. Gonna take it as soon as I can get it. maybe I invest it and there’s a break-even and I’m gonna make more money on my investments than the Social Security administration”– Whatever the case may be. Just make sure you have a plan and understand the consequences of either delaying–right? If you want to delay, great; if you want to take it early, great, but make sure it’s encompassed In your overall strategy.
Al: Well, exactly right, and, Joe, so, in some cases, people, maybe they’re not in the best of health, right, and so maybe they want to take it earlier, so There’s a lot of different factors in this, but if you can wait, I mean, that’s the general advice from financial advisors, Is wait as long as you can, and So, in many cases, probably in most cases, that’s a good plan. Now let’s go into Medicare. This Is at age 65, this–when you’re Eligible for Medicare, and It’s–heh! –it’s very confusing, but it doesn’t have to be, right? So, but, I mean, if you Boil it down in simple terms, there’s part A, part B, part C, part D. So A and B and D go together. Kinda leave C separate, so you kinda either pick A, B, and D – A being hospitalization, B being medical doctors, D being drugs–so that’s one way to go, is with those 3 together, or you could do C, which encompasses all of them together, and in some cases, that’s maybe a better way to go. Now, and as you may know, Medicare doesn’t cover everything, and so then there’s supplemental insurance. That’s a whole ‘nother topic, but make sure you sign up when you’re eligible because if you don’t, there can be penalties.
Joe: So go on our website. We got a lot more information on Social Security, Medicare, everything in between. It’s YourMoneyYourWealth.com. Click on that special offer. This week, it is the Retirement Reality checklist. Retirement Reality checklist. Go to YourMoneyYourWealth.com, click on that special offer. We got to take another break. We’ll be back in just a second. The show is called Your Money, Your Wealth®.
Joe: Hey, welcome back to the program. The show is called Your Money, Your Wealth® giving you a reality check on your overall retirement. Go to YourMoneyYourWealth.com, click on our checklist. This week, It’s our retirement reality Checklist. You can check the Boxes, make sure that you are All set for a comfortable Retirement. Let’s see how you Did in the true/false question.
Al: “The most common trigger for early retirement is job loss.” Joe, what do you think– True or false?
Joe: Um, I guess, if it happened to me, like–heh! –it depends. But I–I think that’s false.
Al: OK, let’s see how you did. It turns out you’re right. So the biggest reason people retire Early is health issues, ok? Second-biggest reason is none. Ha! So we’ll skip that one. The Third one is job layoff, right, and then there’s another, so we Got summarized, but basically Health issues and then after That is job layoff.
Joe: ButI think the point of This slide, or the discussion is That half of people are forced into an early retirement. They Don’t necessarily want to Retire, but they’re forced into It. It could–you know, Healthcare, but it might not be Your health, right? You could be A caregiver; it could be your Spouses, it could be a parent, it could be your children. So a Lot of things can happen, so Half of people are forced into an early retirement. That’s why We want you to get a reality Check. Are you all set in case of anything that kind of life Throws at you? When you’re in Retirement now, there are some other steps that you want to Make sure that you’re checking Off your list and, again, it’s Just did you reach your savings Goal? Do you have enough money in your kitty to make sure that It’s gonna provide you the Income and the lifestyle that You need for the rest of your Life, as well as if you retire Early, do you have enough, do You have to work later, things Like that? Now, again, re-evaluate your risk because Things change in life. Looking At a withdrawal strategy, how Much money can you take out of The overall account, and then, Finally, how’s the taxation On that income?
Al: Yeah, I think those are kind Of the 4 key things, and so this Is a good time, perhaps, to make A little change in your plan, Change in your investments, if You need to be a little bit Safer, right? But let’s go over an example of the kind of–to Make this clearer. So, can I Afford to retire? So here’s an Example of somebody that has $32,000 of Social Security, and They got pension. Good for them because not everyone has a Pension these days, so $20,000 Of pension. Then they look at the retirement savings. It’s About $700,000, so you use that 4% distribution rate. This is Just a guide. It’s a rule of Thumb. It’s not going to work for everybody, but it gives you an idea. So $700,000 is the Savings times 4%. $28,000 is Roughly what you could spend from your assets over, you know, Your first year of retirement. It would go up a little bit After that, based upon 4% of What you have at that point. So $80,000 in this example is What you can spend in Retirement, given these Assumptions. Can you live on $80,000? If you can, great. You’re all set. If not, you Might need to make some changes, And, Joe, so that’s when people Have to think about do I get a Part-time job, do I try to Reduce expenses, do I get A reverse mortgage? Any number of things can be looked at.
Joe: I mean, this is a Really good exercise that Everyone should be doing as they Approach retirement to say, “hey, can we do this, what is Our fixed-income sources, what Are we at right now,” right? Because you’re 65 years old. You Don’t necessarily have another 20 years. Do you have a pension? Do you have real-estate income? What other types of income can You derive from different Sources? What have you saved Over your lifetime that you say, “you know what? I want to retire Today.” and do this exercise and You’re gonna get a number. Some Of you are gonna be really happy with the number, and some of you Are being like, “uh, that’s A little light.” can you live Off of that? Because that is your Paycheck, right? That’s what you Can spend. Most of you will look at that and say, “ok, great,” But some might say, “you know What? I don’t care. I’m gonna Spend a lot more,” and guess What. You’re probably gonna Run out of money, because then you’re Just gonna be able to live off of $52,000, right? That’s your Fixed-income sources, so be Careful of what you’re spending Out of the overall portfolio Because if that drains, then you’re really stuck at a lot lower number.
Al: It’s a good point because People think, “700,000? I can Spend $70,000 or more per year,” Right? So you got 10 years and then you’re right, you’re living on your fixed income. So something else you need to Consider is your investments as you’re in retirement. So, in general–this is a Generalization–you want to have A little bit more safety, so This might be an example. Maybe Your equities might be lower– Might be 30%, 50%, in some Cases, 60%. We’ve seen people in their 80s that have 100% Equities because it’s for their Grandchildren, right? So it Depends what the goal is, but on Average, people are–they save Because they need this money For their own spending in Retirement, so you want to have A little bit more safety, Joe, in your portfolio.
Joe: Yeah, and without question, it’s, again, looking at what is the money for, what are you Trying to accomplish with it, How much income do you need to Derive? Let’s say you have a Really good pension, and you Don’t necessarily need the Assets and it’s gonna get Passed, like Alan said. Well, Of course, you don’t want 50% in Stocks. You’d probably want 100% In stocks if it’s gonna go to Your grandchildren that have a 40-year time horizon. So, again, you got to narrow this down, but I think a lot of people don’t Understand. It’s like, “oh, Should I be changing my Portfolio, and if so, when and How and how much risk should I Be taking on?” you should get a Little bit more detailed, but I Think this is at least a good Rule of thumb to follow.
Al: yeah, and then, Joe, then It’s a matter of “how much can I actually withdraw from my Portfolio?” and here’s a slide With a lot going on, but there’s A lot of good information on Here. So this is how much that You could pull out of your Portfolio and still survive Through retirement. This is Based upon a 25-year time Period. Let’s start with 99% Certainty. So it’s hard to get 100% certainty when you’re Talking investments, but 99% Certainty, you could withdraw 4.1% from your portfolio at age 65, go to age 90 with a 95% Certainty as long as you have A conservative portfolio. This Would be about 20% in stocks. If You have a balanced, more like 50%, well, then maybe it’s a 3.5% distribution rate, and if You have a growth, maybe it’s Only 3%. Why is it lower with growth because I thought “growth,” you make more money? Well, what happens with growth Is it’s more volatile, and if You hit the wrong cycle, the Wrong time when you first Retire, it makes it harder, with Certainty, to retire. Now, when You think of a 90%, 75%, so here They’re 90% certainty that this Will work. It’s a little bit More even, it’s a little over 4%. As you get into the 75% Rate, you can do a higher Distribution rate, but that Means 25% of the time, this Doesn’t work, so just be aware of that. 50% certainty, you can Have a much higher distribution Rate, but half of you are gonna Run out of money before you get To end of life.
Joe: yeah, I guess the point of this is that the more conservative you are, right, the higher probability of success That the money is gonna last, But the lower income that you’re Gonna be pulling from the Portfolio. If you want to have a high-flying portfolio in retirement, you can pull a lot more money dollars, you could pull a lot more dollars out of the portfolio, but just know your probability of success of that money lasting for 25 years drops significantly. So, hey, let’s switch gears here a little bit. Let’s go to “ask the experts.”
Al: This is Rachel from Cardiff by the Sea. “I’m in my late 60s and making the most money of my Life. At this point, is a Roth IRA a good option for me, or should I take the tax break instead?” Joe, what do you think?
Joe: Very good. I don’t Know. If you’re making the most money of your Life, I don’t know what that Means. It’s all relative, so do You even qualify for a Roth IRA? So there’s qualifications there, if you have a Roth 401(k). Then I would look at, well, how much Money do you have? How Diversified are you? Alan would Probably go more towards the tax Deduction. I’m more of a Tax-free kinda guy, so, um, I think you probably– Both are fine.
Al: Yeah, and I think, Joe, of course, there is limitations, so when it comes to a Roth IRA, if You’re married and make more than $214,000 between the two of You, you cannot do a Roth IRA anymore. When you’re single, it’s $144,000 so just be aware of that. In other cases, though, you got a 401(k) that has a Roth option, that can be a good way to go. There’s a lot of factors, right? Your tax bracket now Versus your tax bracket in retirement, and then, furthermore, it’s like “what do I have in my regular 401(k)? If I got 3 million bucks and nothing in a Roth, maybe I want to go Roth even though I’m in a high tax bracket because I’m always gonna be in a high tax Bracket.” so just think about those types of things. This is David in San Marcos. “I’m still going to have high Income in retirement, so I won’t Need the money from my Retirement funds. Is there a way to avoid taxes from required Minimum distributions?” I’ll Start with that, Joe. So, Roth Conversions, if you do those earlier in life, you’ll have less RMDs. When you’re 72, you could actually give up to $100,000, which count toward your required minimum distribution directly to charity. In some cases, maybe You’ve got other deductions that You can net against that.
Joe: Yeah, other than that, no, right? If you skip or don’t pay taxes, uh, that’s tax evasion. If you decide not to take the RMD, there is a 50% withdrawal penalty. So if you need to take out $40,000, it’s a 50% penalty, So it’s pretty hefty. Well, what did we learn today, folks? First Things first, right? You got to estimate how much money that you need, set a savings goal, re-evaluate your risk because You’re moving through, you know, the different phases of life. And then, when you get to a certain point in that, right close to retirement, start strategizing Social Security and Medicare and things like that. And always don’t forget to understand tax law. Hopefully, you enjoyed the show. Again, go to our website, YourMoneyYourWealth.com, click on that special offer. It’s our Retirement reality checklist. So, for Big Al Clopine, I’m Joe Anderson. You’ve just watched another wonderful Episode of this great show Called Your Money, Your Wealth®.
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