A retirement strategy is like a basketball game: you want every single shot you take to be nothing but net, but sometimes you miss, and you need a Retirement Rebound. Joe Anderson, CFP® and Big Al Clopine, CPA show you how five plays can help you turn things around, get that rebound, and score a comeback.
Calculate your FREE Financial Blueprint
Important Points:
- 00:00 – Intro
- 00:53 Retirement Savings: Actual vs. Perceived Need
- 01:39 – Average Income, Retirement Savings and Expenses
- 02:43 – Average Retirement Timeline: How Will You Fare?
- 04:55 – Calculate Your Free Financial Blueprint
- 06:05 – True/false: Over 60% of Americans worry more about running out of money in retirement than dying
- 07:38 – Strategy 1: Delay Social Security Benefits
- 08:46 – Strategy 2: Save More
- 09:13 – Strategy 3: Spend Less
- 10:50 – Strategy 4: Work Longer
- 12:23 – Calculate Your Free Financial Blueprint
- 13:15 – True/false: Starting in 2025, people age 60 to 63 can contribute 150% of the regular catch-up amount.
- 13:30 – Strategy 5: Catch-Up Contributions
- 15:22 – 4th Quarter Wild Cards: Sequence of Returns Risk, RMD Consequences, Long-Term Care Costs, Asset Allocation
- 16:55 – I heard that you’ll spend 80% in retirement of your current spending now, what is the reason?
- 19:54 – What’s a ballpark number I can use for rate of return on my 401(k)?
- 21:15 – Calculate Your Free Financial Blueprint
Subscribe to Your Money, Your Wealth® on YouTube!
Transcript:
Joe: All right. Sometimes life is like a basketball game or your retirement strategy is like a basketball game. You wish that you get every single shot, but sometimes you miss and you have to get that rebound. When you look at today’s retirement strategy, are you going to rebound to make sure that you win the game?
Welcome to the show everyone. Show’s called Your Money, Your Wealth®. Joe Anderson here, President of Pure Financial Advisors. And I’m with the coach today, Coach Big Al. How are you doing, Coach?
Al: I’m doing great, Joe. How are you yourself?
Joe: I am fantastic.
Al: You want to get in the game?
Joe: I do want to get in the game. What we’re going to talk about today is to make sure that you get that retirement rebound and come back when you’re down to make sure that you can win that retirement game. That’s today’s financial focus.
So when you’re talking about down in that first half, are we down more than ever? People ages 50 plus, 20% of that age group has zero dollars saved for retirement. Zero. 61% are worried. Will they have enough money to retire? 61%. I would imagine that number is a little bit higher, but there could be some false confidence. Who knows? Let’s look at some other stats. $408,000. That is the average balance of a retirement account of someone 55 to 64. $400,000 is a pretty good balance. But I think most people think in this age group need $1,600,000 so they have some work to do. Let’s get a game plan. Let’s bring in the Coach.
Al: All right, well, let’s get in the game. We’re talking about Mr. and Mrs. Average, age 56. Well, they make about $105,000 a year, $78,000 in expenses, and $58,000 in a savings account in addition to their retirement savings. And this is from Bureau of Labor Statistics. So Joe, this is kind of considered to be an average couple.
Joe: Yeah, 56. They make $100,000. They have about 4 times their annual salary, so they’re sitting in pretty good shape. But let’s see, are they, do they have enough to win the game? And if they don’t, how do they rebound to make sure that they put the right strategy in front of them to win that game? Let’s look at some other stats here. 7.5% on average is what people save in their overall 401(k) plan in that age group, again, and most 401(k) plans, they match 3.9%. So if we go back to Mr. and Mrs. Average, they have $400,000, $100,000 of that gross income, they’re gonna save 7.5% of that. And the company’s gonna match ’em 4%.
Al: Yeah. So that’s a great place to start. And then let’s talk about, well, when do people retire? So the average retirement age actually turns out to be about 64. So that’s what we’ll use for this couple. And then life expectancy somewhere around 89, 90 for a couple, in some cases even more. So we’re gonna use 89 as our, as our date that we have to have funds to get through.
Joe: Yeah. If you look at the time of the game, this is 25 years, so in some cases people will live in retirement longer than their working years. So we are looking at a longer and longer retirement as people are living a lot longer. So you want to make sure that you have the right strategy to make sure that you hang in there the whole game.
Al: So if they do all these things in 8 years from now, they retire at age 64, what do they have given a 6% rate of return with the savings that we talked about? They have about $800,000 in savings. Now their spending will be higher because of inflation. So that $78,000 becomes $99,000 in a few years. They got $40,000 of combined Social Security as an estimate. So you got to do some math. They need $99,000. They got $40,000 coming in. So they’re short. They’re short $59,000. $59,000 is the shortfall. That’s what has to come, Joe, from their investment accounts.
Joe: If you look at $59,000, this is the shortfall here. This needs to be divided into $800,000. That’s too big of a number.
Al: Yeah, that’s about 7.5%. That is too big.
Joe: So if you’re looking at a distribution rate, you want to be less than 4%. This is almost double. So right away, the game plan doesn’t look very good, right?
Al: Yeah.
Joe: You, we have Michael Jordan on the other team and he’s ready to pounce on us. So if you look, with that higher distribution rate, even though they have a really good savings, they’re spending too much, you can see the dollars run out here and they run outta money roughly at age 78. So there’s some levers that they need to pull. They gotta change their game plan. They gotta make that rebound. So a couple things that they could do, maybe save a little bit more, spend a little bit less. Maybe play with their fixed income. Let’s kind of see what, what happened.
Al: Yeah. Work a little bit longer. Any number of things. So, so let’s- let’s get into that, into our next segment.
Joe: We have something very special this week. It’s our Financial Blueprint. Go to YourMoneyYourWealth.com. Click on that special offer. It’s a button right there, it’ll say Financial Blueprint. You could put in your own information, your own numbers to get your blueprint. It will tell you the good, the bad, and the ugly of your current situation. Are you on track? Not on track? What are some strategies that you need to do to get back in the game? Get our Financial Blueprint. It’s brand new. YourMoneyYourWealth.com. Click on that Financial Blueprint button and get on the right track to retirement.
We gotta take a quick break. Show’s called Your Money, Your Wealth®.
We’re back, folks. Show’s called Your Money, Your Wealth®. We’re talking about a retirement rebound.
Did your retirement shot hit the rim? You need to grab it. Get that retirement rebound. If you need more help, go to YourMoneyYourWealth.com. We got something brand new for you. It’s a Financial Blueprint. You can calculate if you’re on track for your own financial success. YourMoneyYourWealth.com. Click on that special offer, our Financial Blueprint.
Let’s see how you did on that true/false question.
Al: Over 60% of Americans worry more about running outta money in retirement than dying. Wow, that’s quite a statement. You know, Joe, I’m gonna say that’s probably true because we’ve heard that before. Almost hard to believe but seems to be a true statement.
Joe: You’d rather die.
Al: Rather die than run out of money.
Joe: Say goodbye to the loved ones.
Al: I’m out of money, so I’m checking out.
Joe: All right, let’s flip that around, folks. Let’s get back into pushing the levers that can make you not want to run out of money or not die because you ran out of money. Here we are, Mr. and Mrs. Average again, age 64. Here’s the assumptions that they had $100,000 of income. They roughly had $400,000 in retirement savings. They were 56 years old and they wanted to retire at age 64. They’re going to save about 7.5% in the retirement account and their company match was 4%. Now we fast forward Big Al, let’s see how the math worked out.
Al: Yeah, so as a review, $800,000 is where we’re starting from, that’s their savings, $99,000 of annual expenses, $40,000 coming from Social Security, so they need about $59,000 from their portfolio. Right? And we talked about this before, $59,000 into $800,000. That’s over a 7% distribution rate, it’s too high, right? So what are some things we can do? So here’s the first thought. Instead of taking Social Security early, Joe, how about pushing it to full retirement age?
Joe: You would think that that would make a lot of sense, but what we find out is that they run outta money earlier at age 77 versus 78. And why is that? How could that be? Is because the distribution rate on the money or on that nest egg is way too high. So if you look again at the math here, $59,000 needs to come from this $800,000 plus you got to pay tax. Plus there’s inflation. If you’re already pulling 7% out, this doesn’t have a chance and this is just a straight-line rate of return of 6%. How about if the market dropped a little bit? Or maybe the market went up, you can maybe see the money last a little bit longer or run out that much earlier. A lot of financial advisors say push out Social Security so you get a higher benefit. But in this case the years that they pushed out Social Security that distribution rate on their dollars or on their nest egg was too high, and it kinda blew them up.
Al: I think it’s a really good illustration because I think that’s what a lot of advisors will suggest right off the bat. Doesn’t work in this particular case, so let’s try another idea. What happens if they save about 10% more while they’re working for the last few years of working? What happens there? And Joe, interestingly enough, we get back to age 78, but not that much different.
Joe: It’ll get you a couple- maybe a year.
Al: Maybe a year. And and, and part of the reason why this happens with this illustration is because they had money in cash. Now they’re just investing it. There’s not enough time for the investments to grow. So we need to do a little bit better than that, Joe.
Joe: Alright, how about spend less? No one wants to do this. No one wants to save more. No one wants to spend less, but I get it. But how about if you could spend just 10% less of what they’re currently spending. I think what we used as an assumption was roughly $100,000. So if they could spend $90,000, well that gets ’em to 84. Right? So if they spend a little bit less, yeah, those dollars really tend to help you here and in those later years.
Al: Well, they do. And this is a good illustration of spending less not only while you’re working but also through retirement. Right? And so here’s kind of a good way to think about this is if you think you’re a little bit short, try spending less now while you’re working, get used to it, so that your retirement can be that much better. You worry a lot less about running out of money.
Joe: But, you know, if you look at this, these are just straight-line numbers, which I can guarantee you one thing, they’re not going to come true. Because real life happens, is that you’re going to spend a little bit more your first few years of retirement. And then maybe a couple of years you’re not going to go on a trip or their might not be a larger expense. As you get older, you might spend a little bit less on daily living, but you could have higher expenses in regards to health care. So all of this is fluid. But from a high level just to see, all right, well, here’s the nest egg that I have. Here’s roughly what I want to spend and make some assumptions on the rate of return, inflation and taxes. This gets you a good idea if you’re in the ballpark to make sure that you can retire or give you some confidence, I guess.
Al: It does, Joe. Let’s do another one. Let’s say, you know what? I don’t, I don’t want to spend any less. I can’t, I’m spending as little as I can. What if I work just a couple more years? How does that look? It actually works out pretty good. It’s almost the same as spending less. You get out to age 83.
Joe: Two more years. Could be like an eternity for some people. There’s no way I can make it another two years. All right. Now this is the triple lindy’s coming up next, folks. All right. What can we do? We’re gonna spend a little bit less. We’re gonna save a little bit more. We’re going to push out our Social Security and work two more years. The trifecta of things that people don’t want to do. But if you’re disciplined and you do the things that no one else does, guess what? You’re going to be successful. This is a ton of money that’s going to be added to the overall portfolio that can make it out to age 94. If you know what day you’re going to die, this planning is pretty easy.
Al: Yeah. And if rates return a straight-line, as you said.
Joe: But I mean, this is not that terrible. Now you work a couple of years, save a little bit more, spend a little bit less, you know, and then you can see huge results just by moving some of these levers a little bit. You know, boxing that person out just a little bit more or hustling for that ball just a little bit more is gonna get you to win the game.
Al: Yeah. You think about when we first ran this, it was to age 78, and now it’s to age 94. Just by doing a few of these things. And so realize that by making some small tweaks, I’m not saying they’re easy, but it’s not like you’re cutting your spending in half or you’re doubling your savings, but making a few small tweaks can make a very big difference.
Joe: Alright, run your own numbers folks. We got this gift for you. Go to YourMoneyYourWealth.com. It’s brand new. It’s our Financial Blueprint. Are you on track? Not on track. What are the steps that you need to make? Just like the example that we just ran for your specific situation, go to YourMoneyYourWealth.com. Click on that Financial Blueprint button and start your blueprint today. Get that successful retirement underway. We gotta take another quick break. We’ll be back in just a second.
All right, welcome back folks. We’re talking about a retirement rebound today.
Are you ready to rebound your retirement? Go to YourMoneyYourWealth.com. We got that special offer. It’s our Financial Blueprint. It can find out how far behind the game you actually are. Click on the special offer and put in your information, it’s gonna kick out your Financial Blueprint. Hey, let’s see how you did on that true/false question.
Al: Starting at 2025, people age 60 to 63 can contribute 150% of the regular catchup amount. Well, that’s a true statement. So the catchup amount, if you’re 50 and older, is $7500 right now. starting in 2025, it’s $11,250, Joe, so it’s 50% higher. So if you want to, you can get more into savings.
Joe: This is called the fourth quarter comeback, right? You’re a little bit behind, so there’s some tweaks and the tax law just a couple of years ago, starting 2025, that is going to give the opportunity for people in their early 60s to contribute a lot more into their overall retirement plans to get even more of a catchup to get back in the game.
Al: Yeah. And let’s look at an illustration, Joe. So, so let’s say someone who’s aged 59 now working to full retirement age 67 for Social Security. What if they have nothing, right? Now I’m not saying this is easy, but if you could figure out a way to maximize your retirement accounts, that first year age 59, you could save $30,000. Right. And then with the extra catchup, age 60 to 63 for a 4 year period, you could save $137,000. And then those final 3 years, $91,000. So you figure a 6% rate of return, Joe, you can end up with $340,000 starting at zero at age 59.
Joe: Right. Starting at zero at 59 and getting there to $340,000. Yup. That’s pretty good.
Al: That’s pretty good.
Joe: That’s a fourth quarter comeback for sure. But this is why they put this in place. So most people in their later years in their working years are making probably the most money and so hopefully can give you the opportunity to say, man, I wish I would have saved a little bit earlier in life. But guess what? Life happens, now gives you the opportunity to sock that money away either pre-tax or potentially Roth depending on what your flavor is. So another issue when it comes to the fourth quarter, you have to think about sequence of return risk. Al, this is probably one of the biggest risks that people have as they’re taking distributions from their retirement.
Al: Well, it is. So here’s an example of let’s say you’ve got a portfolio that’s earning 6%, but in one case, it goes down 15% for the first 2 years. And another case it goes down that 15% in years 10 and 11. What’s the difference? It’s huge, right? If you retire and it goes down a lot without recovering much, then you’re basically gonna run outta money a lot quicker. And Joe, I think this is illustrates why you can make 6%, but, but even if you pull out 5%, it might be too high based upon the sequence of returns.
Joe: Right. So you, you, you hear about the 4% rule, don’t take more than 4% outta the portfolio. Alright, but how about if the market’s down 20% in the year that you’re taking out 4% or even 3%? Well, if you’re down 20% and you and the markets rebounds 20%, you still don’t have your money back. And if you’re taking distributions from the overall account, it’s very difficult to get caught back up. Just like we see here with a 15% drop in a couple of years, right? Because of the distributions that you’re pulling from the portfolio, with that market drop hit and you’re taking those dollars out, you have less in the pool as the market recovers. It just takes that higher rate of return to get this needle back up here.
Al: Yeah, no question. So another thing to think about is required minimum distribution, which right now is age 73. Soon to be 75, but at age 73, if you’re 73 right now, you have to take a required minimum distribution from your retirement account, IRA, 401(k) and the like, and it’s about 4%, a little bit less than 4% of the account you need to take out and pay taxes on that amount. And in addition to that, every single year, Joe, that percentage goes up.
Joe: Yeah, more and more dollars comes out of the overall account. And for a lot of people, more and more taxes are gonna go to the IRS. Another issue to think about long term care, right? Assisted living facility per year, roughly $65,000. Skilled nursing is on average $100,000. And we’ve seen some places that is twice that.
Al: A lot more. Yeah, it can be. And then also, you got to think about your investments. You got to watch ‘em through retirement. Concentration risk. You have too many of your investments in one basket as they say, or in one stock. Maybe your portfolio is not balanced and so forth. So just be aware. You got to pay attention to your investments. Even though you’ve retired, you got to pay attention.
Joe: Yeah, and I think last but not least, you have to pay attention to taxes. Where’s your money held? Is it all in a retirement account or 401(k) that’s growing tax deferred, which is great. But when you pull those dollars out to spend, right, how are those dollars taxed? These are all ordinary income tax. Where’s ordinary income tax rates going? Potentially up. I like this pool the best, tax-free, but it’s an after-tax contribution. either through a contribution or potentially a conversion, but the dollars come out tax-free. Taxable, this would be a capital asset, which would be taxed at a capital gain. So it’s a favorable tax rate, but it’s not tax-free, but it’s not ordinary income. So understanding where your assets are held and how those are going to be taxed when you take distributions. All right, let’s switch gears. Let’s go to your questions.
Al: This is from Joan in Seattle. “I’ve heard that you’ll spend 80% in retirement of your current spending now. What is the reason?” Well, that’s a great question because you hear that from a lot of financial advisors. I think the rationale is a couple of things. One is maybe you’re not saving into 401(k). So maybe you don’t have your Social Security tax. Also you hear things like, well, maybe I’m not driving to work every day, right? So I don’t have to have as much gasoline and car maintenance and so forth. But Joe, in our experience for people that have saved, they actually spend a little bit more because they have more free time to do the things they want to do.
Joe: Right? You’re, you’re not stuck at work Monday through Friday. Um, you have a lot more free time and with a lot more free time, you want to do different things and different activities, and sometimes those activities cost a couple of bucks. So, um, I, I think that’s what planning really comes into play. And you want to be flexible on your overall planning strategy. Let’s go to the next question.
Al: Mark from San Diego. “What’s a ballpark number I can use for rate of return on my 401(k)?” Good question. It really depends upon how they’re invested. So if you have 0% in stocks, then whatever your fixed income is, that’s probably your rate of return. Most of us have a balance of both, a 60/40 portfolio, 60% stocks, 40% bonds. To be conservative, maybe you say, Joe, around 6%, could be 7%, something like that. But that’s, that’s an average. It’s not, it’s, it’s, you can’t go to the bank with that.
Joe: Right. And that’s over a very long period of time. If you have stocks, they’re risky. And stocks go up and stocks go down. So some years you’re going to receive a 20% rate of return. Some years you’re going to see a 20% drop and it’s the ability for that investor to muscle through those hard times to get that average. If you look at the statistics, most individual investors significantly underperformed the overall market, and it’s because of our emotion. So you can use 6%, but are you going to be disciplined in your strategy to make sure that you can get 6%, I think is something else. But yeah, 6% I think is a pretty conservative number. Alright, that’s it for us folks. Hopefully enjoyed our retirement rebound show from the coach Big Al. I’m Joe Anderson.
Go to YourMoneyYourWealth.com. Click on that Financial Blueprint. It is brand new. YourMoneyYourWealth.com, Financial Blueprint. Get that successful retirement underway. That’s it for us. We’ll see you next time here on Your Money, Your Wealth®.
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.
