#retirement

By:  Henry VanBuskirk, CFP®, Wealth Manager

When you google “Biggest Enemy of Retirement” you will get around 20 million results with answers such as (1) inflation, (2) lower interest rates, (3) higher interest rates, (4) procrastination, (5) taxes, (6) overspending, (7) whatever politician a talking head doesn’t like that day and (8) you.  The answers to your questions, “I’ve saved and saved my whole life.  How do I retire?  Can I ever retire?  Do I need to save more?”, can be very daunting to think about and still might be unanswered.  This may lead you to continue your google search, leaving you overwhelmed and unsure of where to start.  Spending your whole life accumulating and hiking up “Retirement Mountain” might leave you frozen at the summit, not sure how to get down.  We don’t want you to spend the rest of your life in fear, ultimately ending up like Preston Blake (pictured above) from the 2003 movie Mr. Deeds. 

Our goal is to help you get down “Retirement Mountain” safely and understand the biggest enemies you might face on your descent (the deaccumulation phase).  This will tell us what your deaccumulation phase realistically looks like and how you can get there.  The most common retirement foes we’ve faced when helping clients over the years are: (1) Taxes and spending, (2) Volatility, and (3) Emotional decision making.   

Taxes and Spending

This one might seem obvious, but how much you spend and how much you give Uncle Sam are big indicators of how well your financial future is going to look.  If most of your retirement income comes from social security, pensions, and/or annuities, you are mainly on a fixed income.  A large unplanned expense (i.e., home maintenance, medical bills, or car repair) can put a damper on your monthly budget, but you still have to get the money to pay for that unplanned expense somewhere.  To illustrate this, I have the following example:

Clark and Ellen Griswold have the following sources of income each year:

• Clark’s Social Security – $20,000
• Ellen’s Social Security – $20,000
• Clark’s pension – $10,000

They spend $4,000 per month, live in Florida (no state taxes), and also have the following investment accounts:

• Clark’s IRA – $100,000
• Clark and Ellen Joint Investment Account (JTWROS) – $100,000

The joint account has the following positions:

They have no other assets. 

Clark and Ellen have a sudden roof leak that they need to repair, and it will cost them $35,000.

Clark and Ellen have two options:

Option 1 – Take the money from the IRA  

Any distributions received by the IRA owner are taxable at ordinary income when received.  They withdraw $40,000 from the IRA, pay $5,517 in federal taxes, and receive a net amount of $34,483.  Just enough to pay for the roof repair.

Option 2 – Take the money from the Joint account

As referenced previously, the joint account has ABC stock, DEF stock, and XYZ stock.  After talking with our team at BFSG, we recommended that Clark and Ellen sell ABC stock and DEF stock and withdraw $35,000 from their Joint Account.  They will realize a short-term capital loss of -$3,000 and a long-term capital gain of $20,000 but actually won’t owe any taxes this year.  They were able to keep their IRA intact and pocket tax savings of $5,517.  Maybe they should put some of those tax savings in the bank in case of a rainy day. Here is a summary from our tax planning software provider that illustrates the differences between these two scenarios:

Here at BFSG, we abide by Uncle Sam’s rules, but we like to make him work for his money.  Uncle Sam is not a charity, so don’t treat him like one. 

Another enemy that you will most likely face is volatility, which we are going to tackle next.

Sequence of Returns Risk

Volatility is a topic that we’ve all heard over the news lately and it is usually framed in a negative light, but volatility can also be a positive depending on where you are in your life.  If you are a young working professional with 30 years left until retirement, you are able to continue contributing to your 401(k) and history shows that markets tend to go up more than go down.  If you’re reading this article, you’re probably closer to retirement than not.  How volatility can derail a retirement plan is when distributions from a retirement account occur during a time of bad market returns. A large market loss early into a person’s retirement can dramatically decrease the financial plan’s success.  This is referred to as “sequence of returns risk” and is discussed in the following example.

Example: Two clients, Mr. Jones, and Ms. Smith have $500,000 in an IRA and withdraw $15,000 at the end of each year.  The IRA returns repeat every 5 years and is illustrated below:

Mr. Jones and Ms. Smith have the same average return.  Let’s assume that each client’s retirement lasts 30 years.  At the end of the 30 years, Mr. Jones’ IRA is worth $72,407.70 and Ms. Smith’s is worth $234,336.  Here is the math behind those figures:

Where we are in a market cycle and where you are in your lifecycle are two variables that we need to clearly understand.  If Mr. Jones had a large unplanned expense of $100,000 in Year 27, he couldn’t afford to do it.  On the other hand, Ms. Smith most likely could. 

If you say that you are an aggressive investor, we may need to dial the risk down if you are retiring next year and we continue to have negative stock market performance.  This is where distribution planning becomes important, and we can help address any concerns you may have by having a comprehensive financial plan done. 

Now that you have a comprehensive financial plan in hand, the last major hurdle people face in their retirement is themselves.  Rash emotional decisions that are made in the short term can derail your long-term retirement success and is akin to throwing that comprehensive financial plan that you had in the trash.             

Emotional Decision Making

Many people believe that people in the finance and investment industries know everything about the stock market and can time the stock market.  However, that is not true and any financial advisor that says otherwise is in our opinion lying.  If you or I could time the stock market, you wouldn’t be reading this article and I wouldn’t be writing this article.  You would be on your yacht, and I would be on mine.  Where I add value as a financial planner is by making sure that you don’t make any rash, short-term emotional decisions that impact the long-term success of your plan.  In this case, you can be your own worst enemy when it comes to your retirement plan.  When you get nervous and make an emotional decision, the below chart illustrates what the consequence of doing so can be: 

As you can see, thinking that anyone can time a stock market downturn can be detrimental.  We don’t know when those top 10 days over a 20-year period will occur, but we know that if you’re invested every day during that 20-year period, you will (by default) hit those 10 best days.  Getting out of the market (regardless of when or what the talking heads are saying) runs the risk of you missing out on those good days.  Half of the S&P 500’s best days in the last 20 years were during a bear market.  Where our firm adds value is keeping you level-headed and focused on your long-term financial plan. 

In Summary

There are a number of other retirement enemies that we haven’t addressed and some of them might not apply to you.  The only way to know which foes we need to help you face is by determining what your retirement picture looks like.  This is done by crafting your comprehensive financial plan, having continued conversations about it throughout your lifetime, and updating it throughout life’s ups and downs.  Get the process started by giving us a call or by emailing us at financialplanning@bfsg.com.  We look forward to helping you get to and through retirement.

Additional Sources:

1. GMO “Who Ate Joe’s Retirement”, 2015. (https://www.nebo-gmo.com/insights/whitepapers/who-ate-joes-retirement-3)
2. Hartford “10 Things You Should Know About Bear Markets”, 2022. (https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/bear-markets.html)

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

Most people look forward to the day that they can have independence and no longer have to work 9 – 5. In my experience, while everyone wants to retire, most are truly not ready to retire. I am not referring to having the financial ability to retire but most are not emotionally ready for retirement. Retiring before you are emotionally ready often leads to feelings of sadness and not feeling fulfilled. As a result, many people will return to work since they were not ready. This is especially true with individuals that retire early.

With any major transition in life, it takes time to prepare emotionally and become comfortable with the new reality. Major changes are difficult and below are some things to consider helping gauge how emotionally prepared you are for retirement.

Why do you want to retire?

Retirement is more than just watching tv or sitting in a rocking chair waiting for the Grim Reaper to arrive. Retirement is about pursuing passions and finally having the time to do the things that you want to do. For many retirees is about traveling, time with friends and family, or other passions like golf or charitable work. If you want to retire because of a bad job situation or are feeling burned out, then you may not be ready to retire. Remember that retirement does not have to be an all or nothing proposition. Many people will move to part-time work or a less stressful job to help ease them into retirement.

Visualize your retirement.

This is similar to the first question but an important step. What do you see yourself doing in retirement?  Take some time to daydream about the things you want to do in retirement. Allow your mind to wander and no idea is too crazy. This is a time to experiment and really let down your guard. I had a couple that retired and never owned an animal. They decided they wanted a dog and chose the breed. One thing led to another, and their retirement became traveling the country doing dog shows and becoming well-respected breeders. For another client, this was simply being able to go out to breakfast with her husband or friends daily and having time to be more involved in her church. Whatever retirement looks like for you should energize you and get you excited.

Write it down

Studies have shown that you are far more likely to accomplish a goal if you write it down. Take the time to write down the timeline and steps you want to take to retire. If you want to travel, then begin to plan out your first trip and develop an itinerary. By writing it down you can come back and look at this if you feel overwhelmed or unsure about retirement.

Be patient and have realistic expectations

Retirement is a major life event and for most is a difficult transition. Your habits will need to change to adjust to retirement and for most people, this transition is slow and takes about six to twelve months. The important thing during this time is to be patient with yourself and allow yourself some time to find fulfillment and meaning. Begin with small tweaks and experiment with different habits to find what brings you the most satisfaction. During this transition make sure to communicate challenges or difficulties with a friend or family member. Just communicating your emotions can help you feel better about the transition.

Give your retirement a dry run

As clients get closer to retirement, I strongly encourage them to begin some of the things that they are planning for in retirement. If you plan on travel, take some time off before you retire and take some smaller trips to make sure you are happy with the lifestyle and decision you are making. If you are considering a major purchase like a boat or RV, then rent one on the weekends and make sure you enjoy it before making the purchase. Starting some of these habits before retirement will make the transition easier and allows you to experiment without repercussions. If you are concerned about retiring, then take the process slowly by working part-time or in a less stressful job and make the transition to retirement when you are good and ready.

Being mentally and emotionally prepared for retirement is one of the biggest topics that people forget to discuss before retirement. If you do not know where to start or would like to talk with us, you can reach us at financialplanning@bfsg.com.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Contributing to your 401(k) may help you build retirement savings over time – without impacting your take-home pay as much as you may think. Consider the hypothetical example below, which shows how a 2% increase in pre-tax contributions could potentially cost you only $30 per paycheck.

Want to learn more about saving for retirement? Visit BFSG University for on-demand webcasts on a wide range of financial wellness topics.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

*Hypothetical data are for illustrative purposes only and are not intended to represent past or future performance of any specific investment. The balances shown assume a $50,000 yearly salary, a biweekly pay period, a federal tax bracket of 22%, and no state or local taxes.

If you’re a decade or so away from retirement, you’ve probably spent at least some time thinking about this major life change. How will you manage the transition? Will you travel, take up a new sport or hobby, or spend more time with friends and family? Should you consider relocating? Will you continue to work in some capacity? Will changes in your income sources affect your standard of living?

When you begin to ponder all the issues surrounding the transition to retirement, the process can seem downright daunting. However, thinking about a few key points now, while you still have years ahead, can help you focus your efforts and minimize the anxiety that often accompanies the shift.

Reassess your living expenses

A step you will probably take several times between now and retirement — and maybe several more times thereafter — is thinking about how your living expenses could or should change. For example, while commuting and other work-related costs may decrease, other budget items may rise. Health-care costs, in particular, may increase as you progress through retirement.

Try to estimate what your monthly expense budget will look like in the first few years after you stop working. And then continue to reassess this budget as your vision of retirement becomes reality.

According to a recent survey, 43% of retirees said they were “very confident” that they would be able to meet their basic expenses in retirement, while only 32% showed similar levels of confidence in meeting health-care costs.¹ Keeping a close eye on your spending in the years leading up to retirement can help you more accurately anticipate your budget during retirement.

Consider all your income sources

First, figure out how much you stand to receive from Social Security. The amount you receive will depend on your earnings history and other unique factors. You can elect to receive retirement benefits as early as age 62, however, doing so will result in a reduced benefit for life. If you wait until your full retirement age (66 or 67, depending on your birth date) or later (up to age 70), your benefit will be higher. The longer you wait, the larger it will be.²

You can get an estimate of your retirement benefit at the Social Security Administration website, ssa.gov. You can also sign up for a my Social Security account to view your online Social Security statement, which contains a detailed record of your earnings and estimates for retirement, survivor, and disability benefits. Your retirement benefit estimates include amounts at age 62, full retirement age, and age 70. Check your statement carefully and address any errors as soon as possible.

Next, review the accounts you’ve earmarked for retirement income, including any employer benefits. Start with your employer-sponsored plan, and then consider any IRAs and traditional investment accounts you may own. Try to estimate how much they could provide on a monthly basis. If you are married, be sure to include your spouse’s retirement accounts as well. If your employer provides a traditional pension plan, contact the plan administrator for an estimate of that monthly benefit amount.

Do you have rental income? Be sure to include that in your calculations. Might you continue to work? Some retirees find that they are able to consult, turn a hobby into an income source, or work part-time. Such income can provide a valuable cushion that helps retirees postpone tapping their investment accounts, giving the assets more time to potentially grow.

Some other ways to generate extra cash during retirement include selling gently used goods (such as furniture or designer accessories), pet sitting, and participating in the gig economy (i.e., Uber).

Pay off debt, power up your savings

Once you have an idea of what your possible expenses and income look like, it’s time to bring your attention back to the here and now. Draw up a plan to pay off debt and power up your retirement savings before you retire.

Why pay off debt? Entering retirement debt-free — including paying off your mortgage — will put you in a position to modify your monthly expenses in retirement if the need arises. On the other hand, entering retirement with a mortgage, loan, and credit-card balances will put you at the mercy of those monthly payments. You’ll have less of an opportunity to scale back your spending if necessary.

Why power up your savings? In these final few years before retirement, you’re likely to be earning the highest salary of your career. Why not save and invest as much as you can in your employer-sponsored retirement savings plan and/or IRAs? Aim for maximum allowable contributions. And remember, if you’re 50 or older, you can take advantage of catch-up contributions, which enable you to contribute an additional $6,500 to your 401(k) plan and an extra $1,000 to your IRA in 2022.

Manage taxes

As you think about when to tap your various resources for retirement income, remember to consider the tax impact of your strategy. For example, you may want to withdraw money from your taxable accounts first to allow your employer-sponsored plans and IRAs more time to potentially benefit from tax-deferred growth. Keep in mind, however, that generally you are required to begin taking minimum distributions from tax-deferred accounts once you reach age 72, whether or not you actually need the money (Roth IRAs are an exception to this rule).

If you decide to work in retirement while receiving Social Security, understand that income you earn may result in taxable benefits. IRS Publication 915 offers a worksheet to help you determine whether any portion of your Social Security benefit is taxable.

If leaving a financial legacy is a goal, you’ll also want to consider how estate taxes and income taxes for your heirs’ figure into your overall decisions.

Managing retirement income to result in the best possible tax scenario can be extremely complicated. Qualified tax and financial professionals can provide valuable insight and guidance.³

Account for health care

The Employee Benefit Research Institute (EBRI) reported that the average 65-year-old married couple retiring in 2020, with average prescription drug expenses, would need about $270,000 in savings to have a 90% chance of meeting their insurance premiums and out-of-pocket health-care costs in retirement.⁴ This figure illustrates why health care should get special attention as you plan the transition to retirement.

As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although Original Medicare (Parts A and B) will cover a portion of your costs, you’ll still have deductibles, copayments, and coinsurance. Unless you’re prepared to pay for these costs out of pocket, you may want to purchase a supplemental Medigap insurance policy. Medigap policies are sold by private health insurers and are standardized and regulated by both state and federal law. These plans offer different levels of coverage and may pay many of your out-of-pocket costs.

Another option is Medicare Advantage (also known as Medicare Part C), which is a bundled plan that includes Parts A and B, and usually Part D prescription coverage, and may offer additional benefits Original Medicare doesn’t cover. If you enroll in Medicare Advantage, you cannot also purchase a Medigap policy. For more information, visit medicare.gov.

Also think about what would happen if you or your spouse needed home care, nursing home care, or other forms of long-term assistance, which Medicare and Medigap will not cover. Long-term care costs vary substantially depending on where you live and can be extremely expensive. For this reason, people often consider buying long-term care insurance. Policy premiums may be tax deductible, based on a number of different factors. If you have a family history of debilitating illness such as Alzheimer’s, have substantial assets you’d like to protect, or want to leave assets to heirs, a long-term care policy may be worth considering.⁵

Ease the transition

These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier. We are here to assist you prepare for retirement. Feel free to contact us for a complimentary consultation at financialplanning@bfsg.com.

1. 2021 Retirement Confidence Survey, EBRI

2. Note that if you work while receiving Social Security benefits and are under full retirement age, your benefits may be reduced until you reach full retirement age.

3. Working with a tax or financial professional cannot guarantee financial success.

4. EBRI Issue Brief, May 28, 2020

5. A complete statement of coverage, including exclusions, exceptions, and limitations, is found only in the LTC policy. It should be noted that carriers have the discretion to raise their rates and remove their products from the marketplace.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

You have done a great job preparing for retirement, but do you understand the risks? Timing is everything, and early market declines at retirement, particularly if they are paired with rising inflation, can significantly reduce the longevity of your retirement nest egg. Learn from Paul Horn, CFP® in this 2-minute BFSG short as he discusses the least understood risk to retirement – sequence risk and ways you can address sequence risk.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.