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Retire With Confidence | Fix These 9 Common Errors · Retire and Thrive

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  The number one mistake people make in Social Security is
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  taking it too early. So this is a common question
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  that we get asked. How much risk should a person my
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  age take? How comfortable are you with big
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  fluctuations in the portfolio? Ignoring the required minimum
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  distribution strategies from the time you retire until you're
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  forced to take them out at age 73 is a mistake.
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  I'm encouraging you not to have the mindset of we just want to
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  keep growing our nest egg in retirement because you don't
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  want to fall into the tax trap that at age 73 you're forced to
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  pull out your required minimum distributions and that pushes
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  you into a much higher tax bracket.
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  Welcome back to another edition of Retire and Thrive Podcast,
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  where we're focused here on helping you live that retirement
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  with purpose, wealth, and confidence.
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  This is actually episode 26. And today I'm going to kind of
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  peel back the onion. And again, this is some of the
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  messages that we've received throughout the previous podcast
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  that we had. And today, I want to zero in on
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  the 9 most common retirement mistakes and how to avoid them.
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  So I talked last episode about one of the biggest decisions and
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  certainly the most common question that we're asked.
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  And that centers around Social Security.
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  So I feel like the number one mistake people make in Social
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  Security is taking it too early. So mistake #1 taking Social
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  Security too early. Last episode I talked about the
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  window of Social Security. So I won't repeat that here
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  today, but it does start at 62. And every year that you delay
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  it, it grows by 7% up until your full retirement.
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  Then after full retirement until 78, grows by 8%.
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  So taking Social Security too early is often times a mistake
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  because I think the mindset most people have is, look, I've paid
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  into Social Security my entire life.
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  I'm going to get it while it's still around or I'm going to get
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  it in case I'm not around. And that's not a wrong way to
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  look at things. But I will tell you this, taking
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  Social Security too early can have many implications.
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  First and foremost, let's talk about what I had mentioned
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  earlier is by delaying it every single year, you're getting an
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  increase. And that increase at 7% a year,
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  given current interest rates is pretty attractive.
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  Now it's not attractive if something were to happen to you
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  that was untimely and you weren't able to receive Social
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  Security very long. And again, none of us
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  necessarily know what that window looks like.
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  But by taking Social Security early, you're giving up the
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  future income streams of an increase of 7% a year again
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  until age or until your full retirement age.
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  So that in and of itself can be pretty substantial.
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  The other thing that we've looked at and when we build out
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  these financial plans is let's just kind of go through a
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  particular example here or or a sample client, We might have a
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  husband and a wife both retire. They both decide to take Social
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  Security at 62 and maybe one of them gets a pension.
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  But what they realize is that between the Social Security and
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  the pension, let's just say that there are $1000 a month short.
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  So one of them starts tapping their retirement account to the
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  tune of $12,000 per year. What can happen is when they do
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  that, the $12,000 that they're tapping per year might just move
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  them based on current tax brackets from 12% to 22%.
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  So they're now paying taxes at a higher rate.
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  And then what we often see is people retire and then we get
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  the phone call a year or two, sometimes three years later, and
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  the call goes something like this.
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  Hi Dan, this is Mr. Client. And my wife and I were just
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  looking at new cars and we found this new car for $50,000 and
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  we'd love to buy it. And I explained to them that we
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  certainly can do that. However, because now 85% of
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  their Social Security is taxed and they're getting the pension
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  and we're kicking out $1000 per month, all of the income that we
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  pull out of their retirement account is taxed at a much
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  higher rate. So it may have made sense for
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  them to delay Social Security, tap more of their retirement,
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  manage their tax brackets, versus quickly going out and
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  saying, sign me up for Social Security.
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  So mistake #1 taking Social Security too early.
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  Mistake number 2, not planning for taxes.
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  It's kind of interesting back to when social secured or back when
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  4 O1 KS were first started, people often said you need to
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  save and save and save and it's going to save you a bunch of
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  taxes by putting money into these four O 1 KS because you're
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  putting it in pre tax. Now of course you can put it in
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  after tax through the Roth component in the four O 1K but
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  the majority people today still put it in pre tax.
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  So the theory is if I put my money in pre tax, if I put in
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  $10,000 into my 4O1K forget about what the company matches.
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  But if I make $90,000 per year and I put in $10,000 in pre tax,
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  my total taxable income goes from 90,000 to 10,000.
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  Less standard deductions and everything else.
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  But my point is, is the mindset is we're going to save a bunch
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  of taxes and then guess what happens?
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  You build up a beautiful 4O1K, but maybe 8090% of your entire
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  portfolio is in that four O 1K and has never been taxed.
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  So guess what? Now we look at it and say, OK,
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  we decide that we need to supplement our income.
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  We maybe need $3000 per month. So we start pulling out $3000
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  per month. And that might be just enough
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  until we need, as I mentioned earlier, a big ticket item.
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  Maybe it's a car, maybe it's a trip that you've been planning
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  and so it may make sense if you planned early enough to tap
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  maybe the other two types of what I refer to as tax status
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  accounts. Maybe it's the non retirement,
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  maybe it's the Roth account, but not planning for taxes is
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  definitely a mistake. We also see the opposite happen.
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  You know, today husband and wife combined can have a fairly high
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  income, filing a joint tax return and still be in that
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  lower 12% bracket. So let's say that they could
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  pull out an additional, say 10 to $12,000 and still be in that
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  12% bracket and they're not planning for taxes.
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  Guess what? If they don't pull that money
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  out of the IRA, even if they don't need the money, if they
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  don't pull it out, that's a calendar year that's gone by
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  that they could have paid taxes at a lower rate.
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  So that's why planning for taxes and retirement is critical
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  mistake #3 is taking too much or too little investment risk.
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  So this is a common question that we get asked.
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  How much risk should a person my age take?
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  And the answer is one size does not fit all because there's a
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  lot of factors that go into the investment risk.
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  First and foremost is the investors comfortability with
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  the volatility, kind of a tongue twister there, but how
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  comfortable are you with big fluctuations in the portfolio?
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  I have kind of my own theory. My own theory says take on only
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  the necessary risks to achieve whatever goal or aspiration that
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  you have. So that might be somebody says
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  I've got $1,000,000 portfolio, I only need to generate $2000 a
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  month from that portfolio plus all their other income.
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  If that's the case, if they're only generating $2000 per month
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  on $1,000,000 portfolio, that's $24,000 per year.
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  Again, simple math, $24,000 / 1,000,000 dollars.
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  That's a 2.4% withdrawal rate. So what's an appropriate mix for
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  their? Well, unless they have big
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  aspirations of leaving a bunch of money to kids or charities or
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  whatever it might be, I would say fairly low.
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  And why is that? Because historically, if the
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  stock market is averaged around 10%, the bond market has maybe
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  returned 5 or 6%. Why would we want to go all in
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  on the stock market and have tremendous volatility when what
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  we really need is to get something north of 2.4% and
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  enough to hedge against inflation?
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  We don't need to get a 10%. So that would be a case of
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  taking on too much risk. But just the opposite can happen
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  too. Often times we saw people that
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  had saved their entire life, they get to retirement and they
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  feel like everything needs to be safe and secure because they
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  just never know what could happen.
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  Well, the risk of doing that is if you put all your portfolio
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  into let's just say fixed income.
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  Fixed income can be bonds, it can be certificates of deposits,
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  it can be corporate bonds or whatever it might be.
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  The challenge with that quite frankly is now you are 100%
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  dependent on what future interest rates are.
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  In other words, when I look back just to a few years ago when the
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  Fed aggressively raised interest rates in 2022, the 10 year
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  Treasury was approaching 6%, but yet the year before the 10 year
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  treasury was less than one. So my point is this, if you are
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  took your entire portfolio and you've got $1,000,000, guess
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  what? If you put it all into bonds,
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  it's great. When you can get 6% on Treasury
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  notes, that's $60,000 per year. But as Treasury notes have been
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  reduced, now all of a sudden, let's say that it's 3%.
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  Now all of a sudden your income went from $60,000 down to
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  $30,000 at a 3%. So again, that's taking on too
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  little risk. Now we're talking about mistake
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  #4 and that is relying solely on the 4% rule.
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  I touched on this in the previous episode, but the 4%
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  rule is just how much money can you pull out of your portfolio
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  and sustain the actual amount or what we refer to as a
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  sustainable withdrawal rate And lots and lots of studies on
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  this. As I mentioned that it's about
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  4%. Again using $1,000,000 portfolio
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  that would be about $40,000 per year and increase in it every
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  year by 3%. And again, a lot of that's
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  depend on the overall allocation of the portfolio.
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  But that 4% rule, there are times where things are going to
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  change. We go through periods of times
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  where the market doesn't cooperate.
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  And I can think of specifically several times where the market
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  was negative for two or possibly even three years.
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  And relying specifically on that 4% rule kind of creates a little
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  bit of ignorance in terms of ignoring the portfolio.
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  But at the end of the day, it goes back to the one of the
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  lessons I had mentioned last week in that is you need to
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  review your portfolio on an annual basis.
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  Mistake #5 is ignoring the sequence of returns.
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  So let me explain this. This is a big mistake and a lot
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  of people don't think of this, but sequence of returns means
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  what are my returns in the year that I retire versus once I have
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  retired for a while. So let me kind of break this
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  down in a simplistic way. So sequence of returns is if
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  you've got a 12% return in the year retired and then you got a
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  4% return and then you lost 10% and then you were up 12%, the
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  sequence of when those happen matter.
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  In other words, let me put it to you this way.
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  If you're pulling out 4% and you've invested solely in the
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  market, and the market dropped 10% the first year retired, and
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  then the next year it actually dropped by 15%, and the
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  following year, it dropped another 10%.
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  In those three years, you're actually down 35%.
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  So going back to mistake #4 with the 4% rule, if you're down 35%
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  and you're pulling the same dollar amount, your withdrawal
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  rate now is not 4%. It's probably closer to 6 or 7%.
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  And so then it's a case of waiting for the market to come
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  back. Now kind of a different scenario
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  is if you retire and the market's up 10% and then again,
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  it's up 15% and then it's up another 10%, kind of the
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  opposite. It just reversed.
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  So now you're up 35% and then the following year it dropped by
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  10%. You're still up a net 25% less
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  any withdrawals. So ignoring the sequence of
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  returns does make a difference. Mistake number six, kind of an
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  important one is forgetting the RMD planning.
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  Required minimum distribution touched on this again last
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  episode. Required minimum distribution
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  currently is at age 73. So what do we have to plan for?
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  Well, if you retire at age 60 and if you've decided to delay
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  Social Security and let's say you've done a very good job at
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  saving for retirement and maybe between spouses, you've got
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  $2,000,000 in your four O 1 KS and you do nothing.
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  You're, you're feeling like we can just live off of pensions
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  and all of a sudden your pension combined is maybe $60,000, but
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  you don't need any additional income.
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  What happens is the mindset oftentimes is let me just keep
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  building. We've got $2,000,000 between the
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  two of us. Let's just keep growing it and
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  growing it and growing it. What you're ultimately doing is
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  setting yourself up for a larger and larger required minimum
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  distribution once you hit 73. But if your income's only
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  $60,000, you could pull out almost $60,000 in your
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  retirement accounts and still stay in that lower 12% bracket.
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  Again, depends on deductions, whether you itemize or take the
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  standard. But at the end of the day,
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  ignoring the required minimum distribution, required minimum
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  distribution strategies from the time you retire until you're
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  forced to take them out at age 73 is a mistake.
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  So I'm encouraging you not to have the mindset of we just want
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  to keep growing our nest egg in retirement.
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  And that kind of ties back into the tax side because you don't
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  want to fall into the tax trap that at age 73, you're forced to
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  pull out your required minimum distributions and that pushes
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  you into a much higher tax bracket.
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  Mistake #7 is misunderstanding Medicare income rules.
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  This can be fairly complicated, but at the end of the day, the
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  Medicare rules are simply stating this.
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  Medicare people are eligible at age 65.
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  But one of the things that people need to look at is
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  something called Irma. Irma is a 2 year look back that
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  ultimately looks back and looks at what your income is.
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  Now a lot of people that have had to pay insurance between the
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  time they retire in 65 look at Medicare and say, wow, that's
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  great because I'm going to save so much in health insurance
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  premiums. And that may be true, but if you
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  had high incomes in the previous two years, that's going to
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  actually affect your Medicare premium.
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  So don't ignore the income rules as you approach Medicare.
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  In other words, once you start hitting that 63, it's critical
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  that you look at the implications of your income as
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  it as it pertains to your Medicare premiums.
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  Mistake #8 and I've mentioned this before that cash flow is
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  king in my opinion, when it comes to retirement.
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  And so not having, for lack of a better phrase, a cash flow
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  system, figuring out where all the income sources are coming
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  from is a mistake. In other words, once you hit
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  retirement, this is not the time to just wing it.
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  This is the time to be strategic and really think about what are
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  all of my income sources. And again, it gets a little bit
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  overwhelming because there's a lot of different choices.
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  Should we take Social Security? Should we tap into our
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  retirement accounts? Should we take that pension and
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  income on a monthly basis? I would highly encourage whether
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  you use Excel, whether you're working with an advisor or
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  whether it's just longhand writing this out, it's critical
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  that you look at where your income sources are coming from.
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  As I mentioned, by delaying Social Security, you're actually
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  going to get a bump every time that you delay it.
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  So maybe run a couple scenarios that says what would my income
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  look like if I took Social Security at 62 and I took that
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  monthly income and I factor in My Portfolio and if I need
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  additional income to be supplemented from my 401K.
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  But maybe run the numbers and say what if I pulled more out of
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  my 401K and I delayed Social Security and run those.
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  So having some sort of cash flow program or some kind of cash
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  flow system is critical. And the last mistake I see, we
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  refer to this as stress testing your retirement plan.
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  In other words, take a look at all of the uncertainties.
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  You know, some of the uncertainties we can't overcome
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  or we can't avoid. Risk is risk.
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  Whether it's investment risk, whether it's inflation risk,
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  whether it's longevity risk, there's risks all around us, but
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  not stress testing. Your retirement plan says run it
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  through the ringer, go through and look, what are some of the
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  challenges in retirement? You know, I always start with
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  the very basics first and foremost.
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  Worst case scenario, if everything went bad financially,
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  how much money do we need to have in reserves?
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  That would be my starting point. Kind of that nest egg, kind of
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  that emergency fund. And that's going to vary for
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  everybody. And we talked about it when you
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  were in that accumulation phase, but now that you're retired and
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  you're in the distribution phase, it applies just as much.
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  How old is your house? What's the chance of your
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  furnace going out, your roof leaking, needing to have your
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  roof replaced? What kind of cars do you drive?
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  Do you have cars that have 100 and some 1000 miles that maybe
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  need work on them, whether it's a new engine or transmission?
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  Do you have warranties on these cars?
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  Do you have children that maybe are financially dependent on
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  you? All of these things need to be
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  factored in. That would be the starting point
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  about stress testing your retirement plan.
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  Do you have the liquidity necessary in the event that all
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  of those things came at once? Once that's done, the next
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  stress test is look at the income you're pulling out of
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  your portfolio relative to the value.
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  We talked about the 4% rule. If you've got $1,000,000
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  portfolio and you're pulling $70,000 a year, that's probably,
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  depending on your age, eventually going to deplete your
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  retirement. And maybe that's OK.
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  Maybe you've built that into the equation.
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  All we're saying here is take the necessary time to stress
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  test your retirement plan against all of those withdrawal
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  rates, emergency funds, liquidity needs.
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  Build in special budgets for specific items, whether it's for
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  a new car, whether it's for that world trip that you want to take
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  in three years or whatever it might be.
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  That's what we're referring to as stress test your retirement
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  plan so that there are the 9 biggest retirement mistakes that
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  I've seen over the years, and I wanted to just share those with
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  you. So I hope this episode was
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  helpful. Again, I encourage you if you
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  would like to subscribe, just click on the subscribe button
• 20:43
  below. And until next week, we will see
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  you on the next episode of Retire and Thrive.
• 20:50
  Fortress Financial Group, LLC is a registered investment advisor.
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  Advisory services are only offered to clients or
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  prospective clients where Fortress and its representatives
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  are properly licensed or exempt for licensure.
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  The opinions voiced in this material are for general
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  information only and are not intended to provide specific
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  advice or recommendations for any individual.
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  directly. Investing involves risk,
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  including loss of principal.