Download the Withdrawal Strategy Guide:
Important Points:
- 00:00 – Intro
- Case Study: Age 62, 6.2% Distribution Rate
- Case Study: Age 65, 4.2% Distribution Rate
- Required Minimum Distributions Explained
- How to Manage Sequence of Returns Risk
- Healthcare Considerations
- Encore Career
Subscribe to Your Money, Your Wealth® on YouTube!
Transcript:
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Retirement Spending: How Much is Too Much?
Joe: How much is too much? Do you know how much that you can spend in retirement? If you don’t have this dialed in, you could run outta money before you know it.
Welcome to the show, everyone Show Called Your Money, Your Wealth®. I’m Joe Anderson, president of Pure Financial Advisors, and I’m with the big man, Big Al Clopine. He’s sitting right over there.
Al: How you doing, man?
Joe: I’m good. We’re talking about spending today. Al,
Al: it’s an important topic. Not everyone likes to talk about it, but it can mess up your retirement.
Joe: Everyone loves to spend money. You know when you hit retirement, it’s Saturday every day. What do we do on Saturday? We tend to spend money, but did you know? If you were to spend anywhere from two or 3% more than you should, could deplete your assets anywhere from 10 to 15 years earlier than it should have.
That’s today’s financial focus. Alright, let’s take a look at the stats folks. 31% of retirees are actually spending more than they planned. 31%. So let’s break this down. That 31% is gonna run outta money a lot sooner than they anticipated. You need a plan? Let’s bring in Big Al.
Case Study: Assumptions at age 62 with a 6.2% distribution rate
Al: Alright, so today we’re gonna get into some examples and then there’s some risks that you need to know about. But most importantly. We’re gonna talk about solutions. And Joe, I think we’re gonna jump right into an example, which actually doesn’t work out too well. I think the dis distribution rate’s too high. It’s burning down your home just to save warm math.
Joe: burning down your home. To save, to stay warm math. Okay. Alright. Look at this cute couple here. This couple said, you know what, I wanna retire at 62. And let’s just take a look at their balance sheet real quick. They got $1.75 million saved.
That’s a ton of money. They’re gonna receive $36,000 in Social Security benefit, but they got this medical gap. So from 62 to 65, they have to pay out of pocket insurance over that three year period, which equals that 72,000. They wanna spend 120. Let’s see what happens, Big Al.
Al: Yeah, so Joe, that works out to be a 6.2% distribution rate and how that’s calculated.
You take a look at the spending 120,000, right? You gotta add the, extra health insurance that you gotta pay for 24,000 a year. You subtract that Social Security, then you divide it into your almost 2 million of assets, you’d think you’d be fine, but in this case, 6.2%, you really need to be closer to 4% to make the math work.
Joe: Now, if the market does seven, 8%, it’s all about the assumptions that you’re running in your overall, you know, planning that you’re doing.
Al: Yeah, and one of the things you have to be aware of is if you do. Retired age 62. And you do need to take your Social Security for cash flow, realize you’re getting about a 30% haircut, on compared to full retirement age, which right now is age 67.
So what does that mean? It means your benefit every single month for the rest of your life will be 30% lower than it would’ve been had you waited a full retirement age.
Joe: And we see this often is that, you know what? I’m gonna take it as soon as I can get it. I don’t believe that the system’s gonna be around or it’s gonna go broke.
Or maybe it’s, I’m going to receive even more of a haircut, which is fine to each our own, but I have a few million dollars. I wanna retire at 62. I wanna maintain my same lifestyle. All the math in my head, yeah, things are looking pretty good, but then you throw these curve balls in here. This is that three year health insurance gap that we’re talking about.
We gotta add $24,000 additional a year over the next three years, which is $72,000. Then we look at, all right, what happens? Hey, we’re looking pretty good. And here’s the assumptions. We’re running this at 6% with three and a half percent inflation, and we’re running a 2% cost of living, so that $120,000 is increasing with inflation.
The assets themselves, that 1.75 is gonna grow at a 6% growth rate, and then we’re looking at three and a half percent inflation on my expenses. Looks pretty good in the beginning now.
Al: It, it does. And then it tails up pretty quickly. and you know, when you think about this, so you think you’re spending 120,000, a lot of people miss that extra health insurance that they may have to pay for a few years.
And here’s another thing people tend to miss, is once they’re retired, they have more time. When you have more time, Joe, you tend to spend more money on leisure. And travel.
Joe: Couple things. This is done hypothetically, of course, with a financial planning software that some of you do at home. Financial advisors use them all the time, but this is no way this is gonna happen.
Guaranteed that the, these numbers are wrong because what software does, and why I think it’s a little bit dangerous is that it’s running your assets at 6.15% every single year. You’re taking 6% out plus inflation, but the market doesn’t go like. 6% per year, right? What happens is that the market each year is gonna be going like this, right?
Maybe not that drastically. So as I’m pulling those dollars out in down markets, or if I’m pulling dollars out in up markets, right, you’re gonna have a totally different outcome here. So it’s understanding, hey, this is a good gauge to see if it’s a. Hey, maybe we should try this, or it’s a gauge. No, I gotta work a little bit longer.
Al: Yeah, said. I think it’s, important to realize that these are just kind of ballpark ideas. Planning is something you gotta do over time because things change. Markets change, your spending changes, your health changes or whatever it may happen. You gotta plan for all these different contingencies.
Joe: Absolutely. It’s a living, breathing document. You gotta make sure that you’re looking at this. All the time. Hey, if you want some more help, if you need to get started with your withdrawal plan, go to YourMoneyYourWealth.com where you have our Retirement Withdrawal Guide that will walk you through all the different ideas and strategies that you gotta be thinking about.
What’s the assets that you need to have, depending on how much income that you want to derive. What is your Social Security strategy? What about taxes? What about sequence of return risk? All the above. You need to understand the risks that are ahead of you so that you can plan for them. When we get back, we’re gonna go through another example.
We’re gonna pull some levers. Hopefully that retired couple makes it all the way through retirement this time, don’t go anywhere. Show’s called Your Money, Your Wealth®.
Andi: Do you know what your financial future looks like? Now there’s a quick and easy way to find out your likelihood of retirement success. Go to YourMoneyYourWealth.com and click on the Financial Blueprint icon. Input your details and it’ll analyze your current cash flow assets and projected spending for retirement. It’ll then calculate three scenarios to help you determine your probability of success and actionable steps you can take now to achieve your retirement goals. And it’s all yours for free. Take control of your retirement future with a Financial Blueprint today.
True/False: 50% of working Americans consider working longer instead of retiring
Joe: Hey, we’re talking about running outta money. How much is too much? How much can you spend in retirement? Go to YourMoneyYourWealth.com. We have our Retirement Withdrawal Guide. It’ll walk you through all the steps that you need to make. One, you start taking distributions from your portfolio. Saving money to retire. Is a totally different type of planning once you hit retirement. And now to take that money out, go to YourMoneyYourWealth.com. Click on that Retirement Withdrawal Guide. Let’s see how you did on that true false question.
Al: 50% of working Americans consider working longer instead of retiring. True or false? 50%. That’s a big number, Joe.
Joe: Yeah, they’re gonna, yeah, we should work longer, but I still think they pull the plug and retire anyway.
Al: Yeah, so it turns out it’s like 70% actually consider working longer. However, a lot of people retire, early
Joe: life gets in the way.
And it’s like layoffs, health issues, whatever. So that’s why I think you need a plan today. You have to get your strategy figured out today. Alright, let’s dive in. Let’s go to an another example of that lovely couple, Al.
Case Study: Assumptions at age 65 with a 4.2% distribution rate
Al: Yeah. So here’s an example where a couple is retiring just three years later. Instead of 62 at 65, we’re just to be conservative, we’re starting at the same asset level, but they have another three years of $150,000 of income that they’re not using their portfolio.
Look at their Social Security by waiting a few years, it’s a lot higher than it would’ve been. Their analyst expenses are roughly the same. So I think, Joe, this one would work out better.
Joe: sure. Right. Alright, so they have the same amount of assets. They have $450,000 of extra income over that time period.
So what does that mean? They’re not pulling from their portfolio and they have a couple extra bucks that they can continue to save for their retirement. That’s $90,000. And then they get a little bit of market growth hypothetically, right? Or if it’s stagnant, it still probably looks pretty good. Medicare al
Al: Age 65 is when you qualify for Medicare, so you don’t necessarily have that private insurance.
You may wanna get supplemental, but it will be a lot cheaper than what you’re paying to get to Medicare. So your expenses will actually go down at age 65 because you don’t have those private insurance payments.
Joe: So we talked about them claiming their benefit at 62, they waited three years. They’re saving a little bit more money.
They don’t have that insurance gap. They get Medicare at 65. They also have a lot larger Social Security benefit. Because they have a 30% haircut. If they take it at 62, they’re still gonna get a little bit of a haircut from their full retirement age, but it’s not gonna be 30%. Their benefit is actually gonna be roughly $50,000 versus 36 or $37,000.
So right pulling levers, three more years, this is gonna have those assets last just a little bit longer.
Al: Now in their case, then they end up with a 4.2% distribution rate, which is about 2% lower than our first example. And this is something that actually has a much better chance of being sustainable.
Joe: Right, and you’re looking here, your assets are gonna continue to grow given those same as same assumptions, 6.15% of, asset growth, 3%, three and a half percent inflation, 2% cola. But then it kind of tails down here. Here’s another example of, all right, this looks better. I run outta money at age 94. If you think you’re gonna live to age 120, this plan still doesn’t work, but 94 is better than 85, right?
So you just pushed out another 10 years of assets by working three years. So the math works really well in this scenario. Here’s a couple things as well, is, you’re spending $120,000. You know, some people spend a little bit more in the beginning of their retirement. And they might spend a little bit less later in life, but sometimes that might increase just due to healthcare costs and other ancillary expenses.
But this is why you just don’t map it out here and say, all right, I’m good for the next 30 years.
Al: Yeah. You can’t set it and forget it. It’s something that you have to keep looking at over time. This is the reason why we run these kind of scenarios is to give people an idea if they’re on track for retirement, but financial planning is something ongoing.
Joe: Alright, you could do this yourselves. Folks, go online, type in YourMoneyYourWealth.com. Click on the special offer. It’s our Retirement Withdrawal Guide. It’ll give you strategies on how to withdraw your overall assets. It will set a game plan for you of how much money that you’re spending, how much assets that you have.
How do you think about Social Security? Do you have pensions or real estate income? Are you gonna work part-time? What is the tax implications gonna be on the income? Are you diversifying from an investment perspective and also from a tax perspective? All things that you need to consider once you start approaching retirement and start taking those withdrawals.
When we get back, are you gonna do some rapid fire, some solutions and strategies that you need to be thinking about? When do you start taking money? Don’t go anywhere. Shows called Your Money, Your Wealth®.
Andi: Do you know what your financial future looks like? Now there’s a quick and easy way to find out your likelihood of retirement success. Go to YourMoneyYourWealth.com and click on the Financial Blueprint icon. Input your details and it’ll analyze your current cash flow assets and projected spending for retirement. It’ll then calculate three scenarios to help you determine your probability of success and actionable steps you can take now to achieve your retirement goals and it’s all yours for free. Take control of your retirement future with a Financial Blueprint today.
True/False: If you have $2M in a 401(k), the RMD will exceed $50,000
Joe: Hey, welcome back. How much is too much? We’re talking about spending money in retirement. We all love to spend a little bit of money, but how much is too much? Go to YourMoneyYourWealth.com. Click on that special offer this week. It’s our Retirement Withdrawal Guide. I’m telling you, taking dollars from your portfolio is completely different than saving into it.
Now, some of you have such a hard time spending a dollar. Right. It’s like, oh, I don’t wanna spend any money from the portfolio. For you. You wanna make sure that you have a strategy in play, and so you can actually enjoy your retirement. You can go on trips, you can actually afford to spoil the grandkids.
You can do all sorts of different things if you have the strategy, because some people are so afraid to run outta money that they don’t want to touch it. Others are like, wow, we’re going on trips. We’re buying the rv, we’re doing the pool in the back. And they might not have enough capital to make sure that they can have the lifestyle that they want through end of life.
So figuring out with your withdrawal strategy is key. So go to YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Withdrawal Guide. Let’s see how you did on that true false question.
Al: If you have 2 million in a 401(k), the RMD will exceed $50,000. True or false? What do you think? that’s a true statement. In fact, I kind of think about this, that your RMD required minimum distribution usually starts somewhere around 4%, right? 4% of 2 million. That’d be about 80,000, Joe.
Joe: right here, 75 to $82,000, $2 million retirement account.
Required Minimum Distributions Explained
What is an RMD? All right. RMD is a required minimum distribution. Required minimum distribution. And what does that mean? the IRS says, Hey, we gave you a tax deduction by putting money into a retirement account. A 401(k), 403(b), IRA, TSP, whatever the case may be. It was a pre-tax contribution.
All of those dollars accumulated for you. Tax deferred. And then when you pull ’em out, that’s when you have to pay the ordinary income tax. For some people, they might have Social Security, they have a pension. They could have real estate income where they don’t necessarily need to touch the money in their retirement account. The IRS says, no, I don’t care if you need to spend the money or not. We’re gonna force those dollars out. You have to take money out of your retirement account.
Al: Yeah. RMDs, you know, some people have to pull money outta their IRAs, 401(k)s and so forth just to live off of. But those have done a lot of saving.
Were good savers. They may not wanna pull money out ’cause they don’t necessarily need it. Then they have to pay more taxes. It pushes them into higher tax brackets. They have higher Medicare premiums and their provisional income, which is in relationship to how much of Social Security income is taxable. That’s higher as well.
Joe: Yeah, all the dollars that are gonna come outta your retirement account, our tax debt, ordinary income rates. So if you don’t need the dollars, you have your pension, Social Security, real estate income, maybe someone’s working part-time, I don’t know. But those dollars force out. And what happens is that you get this bracket bump, it pops you into another tax bracket.
So it’s like, wait a minute, all these dollars are forced outta my retirement account, and they bump me up into a higher bracket where I have to pay even more tax. So understanding what your required minimum distribution is and what that looks like over your lifetime is gonna be a key for, you know, your planning strategy.
IRMAA, what does IRMAA stand for? Al?
Al: Income related monthly adjustment amount, and that is a mouthful.
Joe: Basically what this means is that your Medicare premiums are getting adjusted. And they take a look at what your income is. And there’s thresholds depending on what your premium is going to be. And your premium is based on your IRMAA amount, your adjusted gross income for, for simplicity’s sake.
As your income goes up, your Medicare premiums go up. As your income goes down, your Medicare premiums go down. When I have to force out an RMD that’s gonna put me into a higher bracket, guess what? I also might have to pay. More Medicare premium, and then there’s this provisional income, which means that your Social Security is going to be taxed.
They look at a provisional income formula to determine, I guess, how much of your Social Security’s gonna be taxed.
Al: You take money outta your IRA heavier withdrawals. It causes more income, which makes more of your Social Security tax, which means you pay higher tax, which means you have to take more money outta your IRA just to pay the tax.
Joe: Yep. That’s the. Social Security Tax Monster,
Al: apparently.
How to Manage Sequence of Returns Risk
Joe: All right. Here’s one that I talked about before. The break is this sequence of returns. In my opinion of doing this for 20 some odd years, is that I still think that this is the biggest risk out there. We don’t know what the markets are gonna do. We could guess or guesstimate what the markets are gonna do on average over a long period of time. So as I’m doing my financial planning, or I’m on my, you know, retirement calculators. You’re putting in a dollar figure or a percentage of what you think the markets are gonna do, and it’s gonna do a straight line.
But markets don’t work that way. Some years they’re up, some years they’re down, and so on and so forth. So we have David and Ann. Their average rate of return was the same, but guess what we had David. He had a decline of 15% in his first couple of years of retirement. Now mind you. Their average rate of return is the same, but it depends on when David retired or Anne retired.
If David retired in a time period where the markets were a little bit choppy when he first retired and received a decline in the overall markets, right? He get this decline, but he still needs his income. He still pulling the dollars out and he doesn’t really have a thought out strategy. He could run outta money.
And she had the same decline, but it happened later, right? So she had maybe a flat or couple percentage in the beginning. She’s cruising along, but then we get that decline. She’s still not gonna run outta money. The sequence of return. So if you have a bear market when you first retire versus a bull market, it makes a significant difference on how many dollars that you have left at the end of life or how comfortable you feel. Most people here, if it drops to 4 83, they’re going back to work.
Al: Yeah. They get really worried and, so here’s maybe how to think about this. In this example, we actually showed a 5% return, so a million dollars taken $50,000 out per year. With a 2% cost of living, that’s a fixed amount with a cost of living.
If the market declines, it’s not gonna work. So you have to think of it differently. You in years where the market’s way down, you’re gonna have to pull out less or have other resources or other ways to make some income.
Healthcare Considerations
Joe: Yeah. And then you look at your expenses. We talked about healthcare. You got this insurance cap.
If I don’t wanna retire at 60, 55, any year before 65, when Medicare kicks in, I have this gap, I have to provide my own private insurance. So depending on the coverage that you have, how old you’re, your health is gonna determine what that insurance cap is and how much of those premiums you got.
Medicare coverage, right? So you have premiums. And then we talked about IRMAA. IRMAA again, Al.
Al: that would be income related monthly adjustment amount, right?
Joe: Right. You got your Medicare coverage that hits at 65, but you still have premiums there. And then I think most people will have some sort of long-term care.
Some will be quite long, some will be quite short. But as we get older and we age. Right. There’s more medical costs that you have to plan for. We don’t know when that’s gonna happen, if at all, but you wanna make sure that you have a strategy and a plan for healthcare considerations.
Al: Yeah. And sometimes we just don’t really think that much about healthcare.
We’re healthy when we retire, and it’s, sometimes not part of what we think about. Here’s an important thing to know though, when it comes to long-term care that is not covered by your typical health insurance, so you have to have some other kind of plan to pay for it. Alright, here’s something else to consider in terms of your spending in, in this example, if you’re spending $60,000 a year, you are gonna run outta money at age 85.
Now, if you spend 10% less 54,000 a year, you add five more years before your money runs out. So sometimes just little changes in your spending can cause a big difference.
Encore Career
Joe: How about if you don’t wanna reduce your spending? Okay, I can have an encore career. what does that mean? I don’t know. Maybe I consult, I make that extra dollars up as a consultant and I work a couple hours a month, a week, a day, whatever that is, just to get a couple of extra dollars into the overall household.
So I’m not pulling those dollars from my portfolio. You know, it’s a gig economy, so be, ah, let’s be an Uber driver. I don’t know. You could teach or tutor, You know, you have a lot of years of knowledge in whatever craft that you have. Maybe you go back and teach the younger generation or their seasonal work, right. Shovel snow.
Al: You know, Joe, another thing too is where you live, right? Certain states are more tax friendly. There’s many states that don’t even have an income tax. Did you know that? Nevada, Texas, Florida, Alaska, to name a few. But it’s not just income taxes. You gotta look at property taxes, right? You gotta look at sales taxes, and the states that we have listed on this, map are very tax efficient. You might want to consider moving there if your spending is a little bit too high.
Joe: You have to take action to get things done. Determine your spending. How much money are you spending now? Do you wanna spend more? Do you wanna spend less in overall retirement plan? Conservatively? Most people say, oh, I’m gonna spend 50% of what I’m currently doing now, their first year retirement, they spend 120% of what they’re currently spending now because it’s Saturday every day, folks, calculate your income, understanding what’s gonna come in as a fixed income.
You have Social Security, do you have a pension? Do you have a real estate portfolio? How much income can you derive from your overall portfolio? What does that portfolio look like? You have to look at your healthcare. If you’re gonna retire early or you’re gonna take Medicare. There’s Medigap policies.
There’s all sorts of different things that we just talked about in regards to your health. Then stress test it. Say really bad things are gonna happen. The market’s gonna crash. As soon as I retire, oh, this, you know, I’m gonna have a health event, whatever, right? Stress, test it, and then consider your options once it get done with the stress test, right?
What levers can I pull to potentially keep those dollars flowing? Here’s some quick steps. Take action folks, and then that’s gonna get you that much closer to your goals. This is an ongoing process, of course, that you have to do on an ongoing basis. But it’s a great start. If you want more help, go to YourMoneyYourWealth.com.
Click on that special. Offer YourMoneyYourWealth.com. Click on this special offer. It is our Retirement Withdrawal Guide YourMoneyYourWealth.com. Click on that special offer. It’s free of charge. That’s our gift to you. For Big Al Clopine, I’m Joe Anderson. We’ll see you next time. Folks, hopefully enjoyed the show.
Andi: Can’t get enough Joe and Big Al? Follow us on the Your Money, Your Wealth Podcast — in your favorite podcast app, and on YouTube.
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 CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification.
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.
