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Avoid These 8 Retirement Mistakes · Retirement Answers

• 0:01
  Jacob: The only way to do retirement well is to have ongoing planning and ongoing decision making that's going to be happening rather than saying, hey, I'm going do $100,000 in Roth conversions for the first six years of my retirement. Perfect. That's what the plan said to do six years ago, but we're six years into the future now. We have no idea if that is still accurate. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions.
• 0:26
  If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey friends, welcome back to another episode of Retirement Answers. My name is Jacob Duke.
• 0:49
  I'm your host as always. This week I wanted to talk about eight mistakes that I see commonly made by retirees, and I wanted to kind of let you know what they are. That way you can be informed and hopefully avoid these yourself. So we're going to kind of jump straight in here. So the first mistake that I see often is a lot of people trying to figure out when to retire, but they end up saying I'm going to retire too early or possibly retire too late.
• 1:12
  Now, what are the mistakes here or what's the risk here? Well, first one is, well, if you retire too early, you run the risk of needing too much money for too long, meaning your portfolio cannot support what your income needs are for the rest of your life. So, if you retire at 50 and don't have enough money saved up, then how are you gonna fill that gap? Meaning you might have to go back to part time work or perhaps even go back to full time work entirely. So there is a risk of retiring too early, meaning you've not done the work until that point, you've not invested correctly, you've not done a plan to figure out can you retire at that age.
• 1:45
  Now, on the flip side of this is retiring too late. Now, why is this a risk? Well, for me, my job, I feel like my goal as a retirement planner is to help you live your best life and help you never run out of money. So, do we accomplish both of those things? Well, whenever it comes to retiring too late, what you're giving up is you're giving up more time with your spouse, your kids, your grandkids, doing the things you want to do in your life.
• 2:10
  You're giving that up because you are still having to work thinking that you have to continue doing that to help save and build up a larger retirement nest egg. And so, what ends up happening is you work too long, and unfortunately, I see this too often or hear about this too often, but I've heard many times that people have waited to retire until later, maybe 67 or perhaps even 70, and then shortly after that, it might be health related, but those people end up passing away. And so they didn't actually get to spend their retirement doing anything they wanted to do because they didn't have the time that thought they would. So the first one here is potentially retiring too early, which means you might run out of money depending on how much you have built up in your retirement nest egg. But then also another risk is retiring too late, meaning you never get to enjoy life the way you had hoped in your retirement years.
• 2:55
  So don't retire too late. That's the one that I see most often. The second one here is not taking advantage of your gap years. Now, I've talked about this in a previous podcast and episode, but your gap years are the most optimal or the biggest opportunity for you to do the most planning possible. So these are the first few years of your retirement.
• 3:15
  So let's say that you retire at 60, well until you get to 67, that seven year gap is your gap years. That's whenever you can do the most planning. That can be things like Roth conversions, that can be things like tax gain harvesting, that can be all kinds of tax planning opportunities to help you lower your future tax bill throughout the rest of your life. So how do you optimize these gap years? Well, first of all, we probably need to delay social security.
• 3:38
  We need to have a plan for Roth conversions if they're necessary. Now remember, they're not necessary for everyone, so don't think that I'm gonna say Roth conversions and you just go do it. You need to evaluate and see what is the benefit or potential of doing that. Also, have to evaluate tax gain harvesting. So if you've got a taxable brokerage account, you need to make sure that you are efficiently harvesting those gains if you have gains built up.
• 3:59
  You could be doing that at a 0% tax rate. I've talked about this in a previous episode. I'll have it linked down below if you wanna go check that out. So that's number two, is not taking advantage of these optimal years that you can do the most planning before you have Social Security kick in, which is gonna increase your income, or have RMDs at 73 or 75, which is also gonna increase your income. Now's the time to plan out a way to reduce those RMDs if that's gonna be necessary for you in terms of tax savings down the road, and ultimately it benefits your spouse, your kids, your grandkids, whoever would inherit this money down the road.
• 4:31
  Having less money in that tax deferred account is gonna be huge for them in terms of their net benefit overall. The third mistake that I see often is a lazy approach to distributions or withdrawal sequences. So whenever you are taking money out of your portfolio for your retirement income, there are different ways to do that. You can have pro rata distributions, meaning you're taking an equal percentage from each account. You can have money coming off from your Roth.
• 4:59
  You can take all your money from your brokerage account. You can take all your money from your tax deferred account. You can flip on your social security immediately at 62. All these different things can be true. What I would say is avoid most of the time, you're going to want to avoid pro rata distributions, which means I'm going take an equal amount or equal percentage from all these different accounts that I have, whether it be a Roth, a taxable, and then a tax deferred account.
• 5:20
  I'm just going to take an equal amount from them, but what you're not evaluating is the future impact of that. So for example, if you are early in retirement and you're not taking Social Security yet and you're not to R and D age, it might make more sense to take from the tax deferred account for the most of your income that you need, so that you are lowering that tax deferred account balance whenever you get to RMD years, which means you give more time for your Roth to grow, more time for that taxable account to grow, and then you have lower RMDs, which is your forced tax whenever you get to 73 or 75. And so taking your distributions and your withdrawal sequence, it's gonna be an important factor in your overall tax plan, but also your overall income plan. So deciding where you're gonna pull your income from is gonna be important because it impacts your retirement throughout the rest of your life. The fourth mistake that I often see is no asset location.
• 6:11
  Now I've talked about this before, but asset location is whenever we invest based on the account type or the taxability of each account. So for example, you wouldn't want to hold your fixed income or your cash in your Roth IRA. You'd probably want that to be growing as much as possible since that growth would be tax free. Now, we'd also have maybe perhaps a taxable brokerage account. Well, wouldn't want that to hold fixed income if you can avoid it, because all that fixed income is gonna be taxable in the year in which it's earned, but it's also gonna be taxable as normal income because it is invested in a fixed income product or a money market style product.
• 6:46
  So in an optimal situation, you would probably say if it's a brokerage account, I wanna lower the amount of income that I'm getting from that. So lower the dividends or lower the interest, and I would most optimally want that to be invested in the stocks or stock funds, so that I am then getting what's called a long term capital gain rate, which means that's a cheaper tax rate on whatever dividends or capital gains I'm getting. And then finally, you have a tax deferred account, which this is probably where you would hold your fixed income if you have any in your portfolio, because this is where it's gonna be sheltered, meaning you don't pay income taxes every single year on that. And regardless of the type of investments that are in your tax deferred account, every dollar you pull from that will be taxed as normal income. So you don't get long term capital gains on a tax deferred account.
• 7:32
  You will always pay normal income tax rates on any distributions from your IRA or your four zero one ks that is tax deferred. Now, what this does is, is this kind of gives us what we call asset location, meaning we want to invest each account differently to achieve the overall investment allocation we're trying to shoot for. So for example, if you're trying to reach a seventythirty overall allocation, you're not going to be seventythirty in each account type. You're going to have more of the bonds that are going to be there. That's going to be in your tax deferred IRA or four zero one ks.
• 8:02
  You're probably going to be 100 stock in your Roth accounts and maybe somewhere in the middle on the brokerage account, depending on when you need that income. So, location is important to lowering your taxes this year, but also lowering your taxes every year in the future. So that's the fourth mistake is why see often people are not doing asset location properly, they're just investing every account the exact same way, which is somewhat of a lazy way of doing it, so we can improve that. So don't make that mistake. The fifth mistake I often see here is people get really conservative in their retirement years from an investment standpoint.
• 8:36
  And I get why. I mean, you're not working anymore, you're not earning a paycheck, so you feel like I can't kind of, you know, stand volatility because I gotta have that money. I've gotta use it to live on and spend. And the reality is that's true, but I think it's partially true. If you've got a million dollars in your retirement portfolio and you need $60,000 a year, whether it be from social security, distribution from your portfolio, maybe a pension's thrown in, so not all of that's from your portfolio.
• 9:01
  But if you need $60,000 a year and you have a million dollars, well, do you need all million dollars this year, or next year, or even the next five years? The answer is no. You don't need all of that money right now today. But you do need all of that money to last you for the rest of your life. So what ends up happening, is a lot of people follow rules of thumb and they say, based on my age, I should be invested fiftyfifty because volatility is bad whenever you're in retirement.
• 9:27
  And that couldn't be further from the truth. What you have to do is you should invest based on your income needs. There are many people who are in retirement who don't need any income from their portfolio. In fact, I have clients that are that way. And so they can take more risk in their portfolio, which means they're going to build up larger accounts and larger nest egg for themselves, their spouse, but also their kids and grandkids down the road too.
• 9:48
  So they're able to pass on more money to the next generation because of their wise decisions right now. So instead of accommodating their emotions or rules of thumb in retirement, what they're doing is they're investing and thinking about it from a bigger picture or in a wiser way, and they're able to optimize their portfolio to leave more money to the kids or grandkids after them. So that's the fifth big mistake is getting too conservative. You don't need all of your money right now today. So you have to invest as if you have a long time horizon.
• 10:17
  A lot of people think their time horizon stops whenever they retire, but the fact is if you retire at 60 and live to 90, you've got thirty more years of time horizon that you should be investing for. So we need to invest appropriately. And I like to use the bucketing system here. If you've listened to me for any amount of time, you've probably heard me talk about this, but I kind of want five years of living expenses not in stocks, meaning we have five years buffer there until we can let the stock market recover and get back to where it was before we had to sell at a loss. So have a plan for your specific needs.
• 10:46
  Understand what your income need is every single year in retirement, and then build your investment plan around that as opposed to following general retirement rules of thumb. The sixth mistake that is really common is a lot of people don't have a plan for what they need to do whenever things go really badly. Right, we have to build into your plan that bad things will happen. Why? Because we know they will, it's just a matter of when.
• 11:06
  We don't know when they're gonna happen, we just know that they will. So we have to have a plan for what we do in those circumstances. What happens if the market goes down 30% in one year? What do we do? What happens if the market goes down 50% in one year?
• 11:19
  What do we do? We have to have a plan for that. We have to have it written down so that we know whenever those times come and emotions are running high, here's what we need to do based on what we determine whenever we were thinking clearly, whenever things were good, whenever we were thinking logically, here's what we determined was the best course of action. It's hard to make decisions whenever things get tough. And so I would say that bad decisions typically get made whenever you're pressed against the wall there, and you're trying to figure out, hey, what do I do?
• 11:45
  Everything's going poorly. So no one has a plan whenever things start going poorly. And the reason for that, that I think is the big mistake here, is most people don't start thinking about what they need to do until the bad things happen. Meaning they're enjoying the good stuff, market's up 30%, we're growing, we're doing all the good things right. I'm not gonna hire a financial advisor, I'm not going to look at it because things are going well, right?
• 12:05
  What's the point in doing that? Well, it's during the really good times that you need to get all the stuff ready for the bad times. You have to prepare for the rough times in your retirement plan. And if you don't have a plan in the good stuff, you're never going have a good plan in the bad stuff. So just know that that is a mistake, and I think that you should use the good years, the good times when things feel really good.
• 12:25
  Use that time to actually go get in place the plan you need or the planner that you need on your team to get that there so that whenever the bad time comes, you have a plan for that and you have someone walking through that with you that can help guide you along the way. The seventh mistake I see all the time is people that are afraid to spend their money. You've worked your entire life. You've saved. You've done all the right things, but you won't spend it once you get to retirement.
• 12:49
  You're living so frugally. You're trying to, make sure you never run out. And I'm sitting here telling you, hey, you can spend another $4,000 a month if you want to, but you're too scared to do so. What that does is that limits your lifestyle. It limits the opportunities for you to enjoy life the way you perhaps wanted to because of the fear of running out at age 85, 90, 95.
• 13:09
  That's my job. That's my job to say that, hey, based on your expectations, based on your life expectations, how long you might live, but also how much money you have and how much you're spending, here's what we can do. And I have to tell people, and it's actually a great joy of mine, I love telling people that, they can go spend more. They can allocate more to their vacation budget if they want this year. But often I see that people are not spending enough, especially during their healthy years of retirement.
• 13:33
  So let's say before 80, they're not spending enough money, which means they're gonna end up having $2.03, $4,000,000 whenever they don't need it at the end of life. And so, that's a risk, and I would say it's a mistake. And so find a way to thread the needle. I feel like my job is to walk that line, right, of not spending too much, but also spending enough to enjoy life and live the life that you hoped that retirement would be and have, basically live out your retirement dreams. So that's number seven, is I often see that people do not spend enough.
• 14:03
  Sometimes I have to tell people, hey, you're spending too much, you gotta pull back a little bit, but more times than not, it's people that are being too frugal, not spending enough of their retirement nest egg, and I would say, go spend it, go enjoy, you've worked for this, this is what it's for. So that's number seven. And finally, number eight, relying purely on projections. I love financial planning software. It's a helpful tool, But I don't think it's anything more than that.
• 14:27
  It does not know the future. It has no way of telling us what is or isn't gonna happen. And a lot of people base all of their retirement decisions whether to retire or not retire, or how much they can or cannot spend, or when to take social security or when not to take social security. All those decisions are based 100% a lot of times on these planning softwares. And the reality is, is I think the planning software can help us be educated, understand our options, and really see the probabilities of one thing versus another.
• 14:56
  What it does is it informs us. It doesn't tell us what to do. And so I see the mistake of people saying, run a projection for me Jacob, tell me what's gonna happen and then I'm just gonna go do that. It's like, well, is your life ever gonna change? Is it gonna go exactly how the software thinks it's gonna go?
• 15:10
  Are markets gonna do exactly what we have input for the expectation of market returns? Is inflation gonna be three and a half percent like the system thinks it's gonna be? Are you gonna spend three and a half percent more every single year for the rest of your life? All these things, the answer is no. So the only thing we know about retirement planning software or the projections or outcomes it produces is that they will be wrong.
• 15:31
  That is the only thing we know about them. So my suggestion is this, stop relying purely on projections, which is a plan. And I say, do planning. So this is ongoing every year, every quarter, every six months we are evaluating where we're at. And based on our new information we have, we can make new educated decisions.
• 15:49
  So, this goes back to a lot of people say, Jacob, can you produce a plan for me? It's like, I can, but it's gonna be wrong as soon as I hand it to you and you walk out the door. Because your life is gonna change. I think that the only way to do retirement well is to have ongoing planning and ongoing decision making that's going to be happening rather than saying, Hey, I'm going do $100,000 in Roth conversions for the first six years of my retirement. Perfect.
• 16:09
  That's what the plan said to do six years ago, but we're six years into the future now. We have no idea if that is still accurate. Tax rates could have gone up. Your portfolios could be down. It could be up.
• 16:19
  All these different things could have changed. Your health could have changed. So I say that relying purely on projections or a one time plan is not the way to go. It's a huge risk, I and think it's a mistake. And so, these are the eight mistakes that I see that hopefully, help you avoid these.
• 16:34
  So I'll run back to them really quickly. Number one, it's retiring too early or too late. Number two, not taking advantage of your gap years. Number three, pro rata or lazy distribution or withdrawal sequences from your portfolio. Number four, no asset location.
• 16:49
  Number five, being too conservative in your investment portfolio. Number six, not having a plan whenever things don't go according to plan. Number seven, not spending enough money. And finally, relying solely on retirement planning projections or software. So, I hope that helps.
• 17:06
  Hopefully it gives you some ideas around what not to do and some of the mistakes that I see often. But if you have questions, feel free to shoot me an email. It should be linked down below. And if you wanna check out me at River Tree Wealth and what we do for our clients, you can also click that link to go check out our website. So thank you so much, and I look forward to talking with you again next week.
• 17:26
  Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only.
• 17:49
  Thanks for tuning into this week's episode. I look forward to talking with you again next week.