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The Brutal Retirement Truths No One Warned You About · Retire and Thrive

0:00
Taxes drive nearly every retirement decision.
0:04
It's critical that you review your investments at least on an
0:08
annual basis, if not more frequently.
0:10
And what you're really reviewing is how is the overall
0:13
allocation? Income planning matters more
0:18
than portfolio performance. Have a purpose in retirement
0:22
because I've seen it over and over again.
0:25
It'll create vibrancy in your retirement.
0:27
Probably the most frequent question that we get asked as
0:31
financial advisors, when should I take Social Security?
0:36
Welcome back to another episode of Retire and Thrive.
0:39
Cami is absent today. She'll be in and out over the
0:41
next few weeks. So today as we've finished up
0:44
Cami and I the series on the book, we did 24 episodes.
0:48
Today is episode 25. And today what I'd like to share
0:52
with you is the feedback we've gotten, and maybe some of this
0:57
will tie directly into the top ten retirement lessons.
1:02
And so today will be a little bit more specific or a little
1:05
bit more what I would refer to as tactical.
1:08
So without further ado, let's dive in.
1:10
The first lesson is retirement is a mindset, not a finish line.
1:16
What I mean by that is when I look back over my career, often
1:20
times people feel like once they hit retirement, they've made it.
1:24
And I like to refer to it is retirement isn't necessarily a
1:28
finish line or a destination, but really it's a journey.
1:32
And again, we talked about in Lesson 1 of the book about
1:34
enjoying the fruits of your labor.
1:37
And this kind of ties into that, that it is a journey.
1:40
And as you approach, or in fact, if you are retired, that you
1:44
need to embrace this chapter. This is the chapter that you've
1:47
worked so hard for. And so it really is focusing
1:50
more about the mindset. And it's not so much I've
1:54
reached the end here or the destination.
1:56
So Lesson 1, retirement is more of a mindset, not a finish line.
2:03
The second lesson that I think is very critical, getting into
2:06
more of the financial side of this is that cash flow creates
2:10
freedom. So let's just step back for a
2:12
minute and let's talk about that cash flow.
2:14
So cash flow, if you think about it this way, when you're
2:17
actually working, you're actually receiving a paycheck
2:21
every single pay period, whether that's once a month, every two
2:24
weeks. And so that's what we refer to
2:26
as cash flow. Once you retire and that
2:29
paycheck stops, then you need to focus on where is my income
2:33
sources. In other words, oftentimes
2:35
people look at their overall nest egg or portfolio, if you
2:40
will, and there's typically a number that people associate
2:44
that with. Like once I reach a certain
2:46
amount, then I'm good to retire. But as we talked about in
2:50
previous episodes, it's not so much about how much money you've
2:53
got, it's more specifically about the income that you have.
2:57
So it's about living off of the income.
2:59
In other words, if you've got an asset that's worth $1,000,000,
3:03
be it your portfolio or real estate or even your home for
3:07
that matter, it's not necessarily the value of the
3:10
asset that matters, it's the income that that asset
3:13
generates, which I'll touch on one of the other lessons here
3:16
today as it pertains to that. But just remember that when it
3:20
comes to retirement, the cash flow is ultimately what gives
3:25
you the freedom. The third lesson is taxes.
3:29
You know, we spent a lot of time talking about taxes and I think
3:32
this lesson I would just title taxes drive nearly every
3:37
retirement decision. So what does that mean?
3:40
Why does taxes drive every retirement decision?
3:44
Because quite frankly, nobody wants to pay the IRS more than
3:47
their fair share. And again, we've all worked very
3:50
hard for our money. So once we get into retirement,
3:53
taxes do make a significant difference.
3:56
In other words, when you are in your working years, you know, I
3:59
look at it and I kind of decipher and I say you're either
4:02
in the accumulation phase or you're in the distribution
4:06
phase. And in that distribution phase,
4:08
once you get in retirement, that's when we're distributing
4:11
some of these assets. And when it comes to taxes, I
4:15
look at things from a fairly simplistic standpoint and the
4:18
taxes are either into one of three categories.
4:22
They're either fully taxable like you might find in various
4:26
retirement accounts, or they might be partially taxable, like
4:31
let's say that you opened up an account and it's non retirement,
4:34
but you may pay some taxes on the dividends and or capital
4:37
gains or third, it's completely tax free.
4:43
And so why does that matter? You've got money that you've
4:45
never paid tax on. Again, typically in a in a pre
4:48
tax retirement type of an account, like a four O 1K or A4
4:51
O 3B, then you might have some non retirement assets that
4:55
periodically could kick out capital gains and dividends.
4:58
And then the third bucket or the third tax type, I should say, is
5:02
the Roth IRA, which is completely tax free.
5:05
And how does that drive retirement decisions?
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Quite frankly, what you want to do is you want to take a look
5:12
and specifically get an idea of what your total income is.
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That could be from a pension, it could be from Social Security if
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you've got other assets, maybe it's real estate income.
5:21
But when you Add all that together, take a look at what
5:24
tax bracket that you're in. And then from there, it may make
5:28
sense to continue to tap from the pre tax that you've never
5:31
paid tax. Or maybe it makes sense to pay
5:33
some capital gains. Or quite frankly, if it's going
5:36
to push you into the next bracket, maybe it makes sense to
5:40
tap the Roth IRA accounts so that there's no tax on the Roth
5:45
distribution, which would not put you into the next bracket.
5:48
The 4th lesson that I want to talk about today is that
5:52
investment review is not optional.
5:55
That's how I'm going to coin the title of that.
5:57
And what that basically says is you must review your investments
6:01
frequently. Now what that basically is
6:04
saying is as you approach retirement, things get a little
6:06
bit more complicated. Your distribution strategies are
6:09
going to change. I just talked about in Lesson 3,
6:11
some of the tax implications may change.
6:13
And quite frankly, we live in a world today where we've seen
6:17
lots and lots of volatility and things do change very rapidly.
6:20
So it's critical that you review your investments at least on an
6:25
annual basis, if not more frequently.
6:27
And when we say review, what are we looking at?
6:30
Are we simply looking at the value went up or the value went
6:32
down? No, that's not it at all.
6:34
What you're really reviewing is how is the overall allocation?
6:38
Does it suit my needs overall, economically?
6:42
Are there some adjustments that should be made to the portfolio,
6:46
whether it's specifically in the fixed income part, the equity
6:49
part, or maybe it's the cash part?
6:51
And again, I don't want to go too deep into this.
6:54
Certainly we could dive deeper into each one of these lessons.
6:56
I'm just hitting these kind of on a high level, but ultimately
7:01
you want to look at your allocation and then potentially
7:04
make minor adjustments. I said minor, not big
7:06
adjustments based on the economic conditions, whether
7:10
that's to increase or or underweight certain asset
7:13
classes or for example, it may mean focusing a little bit more
7:17
on shorter term investments that may provide that liquidity that
7:22
we were talking about from the cash flow.
7:26
The 5th lesson that I want to just talk about is that your
7:29
withdrawal strategy matters more than the 4% rule.
7:34
So this ties back again to Lesson 3 when we were talking
7:36
about cash flow. So let me take a step back here.
7:39
What are we talking about the 4% rule?
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Well, there's been lots and lots of studies that have been done
7:47
that usually talk about a 4% rule.
7:50
And, and the 4% rule is simply saying this.
7:53
If you were to take historically, if you were to
7:55
take your portfolio and put half of it into stocks, half of it
8:00
into bonds and you just Simply put it into indexes and you let
8:04
it sit there. Historically, you would have
8:08
been able to pull out 4% every year and increase that amount
8:14
every year by 3%. And historically you could have
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continued that in perpetuity, meaning forever.
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Now that doesn't mean that that's going to be the case
8:23
going forward. I'm just simply referring to the
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studies that have been done have shown that 4% withdrawal rate is
8:30
something referred to as a sustainable withdrawal rate.
8:32
In other words, again, I like to use simple numbers here, but if
8:36
you had $1,000,000 portfolio and you pulled out $40,000 per year,
8:41
IE that 4%, that's that 4% rule. Now the actual rule in Lesson 5
8:48
is your withdrawal strategy matters more than the 4% rule.
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So why is that important? Well, quite frankly, if you're
8:56
in your mid to late 70s, that 4% rule might not apply to you
9:00
because quite frankly, your life expectancy is going to be a lot
9:03
shorter maybe than someone who retired in their mid 50s.
9:08
So the strategy in and of itself is more important than the 4%
9:13
rule. I think it's important to keep
9:15
that 4% rule into mind. But looking at your overall
9:19
strategy in terms of withdrawal rates and basically at what
9:23
stage you are in retirement is probably more important than
9:28
just simply saying the 4% rule. Now lesson #6 is probably the
9:34
most frequent question that we get asked as financial advisors.
9:38
And that question is when should I take Social Security?
9:44
We get asked that question all the time and I don't necessarily
9:48
like this answer, but the answer is it depends.
9:52
So I coined this title. Social Security decisions can
9:58
ultimately impact your overall retirement up to A6 figure
10:03
dollar amount. In other words, this is a very
10:06
critical decision as you approach retirement.
10:09
So again, in the essence of time, I won't go through all the
10:12
rules and all the nuances of this, but let me just start with
10:15
a couple here. First and foremost, the window
10:19
to pull out Social Security starts at age 62, and you can
10:25
defer it as long as age 70. And you might be asking, why
10:30
would I delay it? Why wouldn't I just take it all
10:32
up front at 62? Well, because if you continue to
10:36
delay it every year beyond 62 up until your full retirement,
10:41
everybody's got a different full retirement based on to their
10:44
age. But right now, the longest or
10:47
the oldest full Social Security retirement age is age 67.
10:52
So let's just go with age 67. So you can take Social Security
10:56
between 62 and 67 in this example, and every year you
11:00
delay it. It's not exactly 7% a year, but
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it's very close. So if you're going to get a
11:05
certain amount at 62 and you delay it till 63, you will get
11:09
an additional 7% increase at age 63.
11:12
Wait till 64, you get another 7% increase all the way up until
11:16
age 67. Now even further from 67 to 70.
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In those three years, the government or Social Security
11:26
will actually give you an increase of 8%.
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Again, think about it from the government's perspective.
11:32
Every year that you delay it, that's less money that they're
11:35
paying upfront. I realize it's going to be more
11:38
money for them down the road. And so which is the better
11:41
answer? Do I delay it until age 70 or do
11:43
I take it right away at 62, or some combination in between?
11:47
Again, going back to the original first answer, it really
11:50
depends. There's a lot of factors that go
11:52
into this. First and foremost is your
11:54
overall health, what you feel like, your longevity, if we
11:57
could tell how long we would live makes this decision a lot
12:01
easier. Second component that ties into
12:04
that is your spouse. If you are married, is your
12:08
spouse younger than you or older than you?
12:11
Did your spouse make more income or less income?
12:13
And all of those factors definitely play into that
12:17
decision. So why is that probably the
12:20
number one question that I'm asked?
12:21
Because I think it has potentially the greatest impact
12:25
in retirement. Lesson #7 I'm going to title
12:28
income planning matters more than portfolio performance.
12:34
So income planning matters more than portfolio performance.
12:40
So I would say the majority of us, and I'm quite frankly guilty
12:43
of this as well, focus more on how much money did My Portfolio
12:48
grow this last month or this quarter or quite frankly, how
12:51
much did it grow in the last year.
12:53
And what I'm trying to say is that's all important because
12:57
down the road that does matter, but focusing on income matters
13:02
more than your portfolio performance.
13:04
So let me give you an example. If your portfolio grew by 8% and
13:09
you ignored when to take Social Security, if your portfolio the
13:14
next year only grew by 5% versus 8%, how big of an impact does
13:18
that really make versus your Social Security, which I said
13:21
earlier could be up to A6 figure income decision depending on
13:25
longevity. So we tend to focus on the cash
13:29
flow. In other words, the income is
13:32
what you're going to live on, not the performance of your
13:35
portfolio. Don't get me wrong, performance
13:37
is definitely important, but I feel like a lot of that is just
13:41
kind of socially talking about your portfolio.
13:46
You know, you're at a party and you want to talk about your
13:49
portfolio was up 12% or you did 11%, somebody else only got 9.
13:53
And I hear it all the time. They talk about what My
13:55
Portfolio performed, but nobody ever says, by the way, I've got
13:59
90% of all of my expenses covered through all income
14:03
sources. And again, whatever those income
14:05
sources may be, nobody talks about that because it's not it,
14:09
it, it, it doesn't grab people's attention.
14:11
Like My Portfolio was up X. And So what I'm trying to say
14:15
here in this lesson is that income planning matters more
14:20
than portfolio performance lesson #8 your plan should
14:25
adjust yearly. And what I mean by that is
14:30
everything changes. So I can use all types of
14:33
scenarios. But when we build out these
14:36
retirement plans and we're looking at the overall
14:38
performance of portfolios, we're looking at incomes, we're
14:41
looking at withdrawal strategies, we're looking at
14:45
inflation, all of these nuances, all of these things that affect
14:49
people once they retire, the plan needs to be looked at at
14:54
least on an annual basis because things do change.
14:58
And again, I mentioned a few, but health changes, maybe there
15:02
was an inheritance that was received, maybe a home got sold,
15:07
maybe a cabin was purchased, maybe there was a home that got
15:10
purchased down in Florida or whatever it might be.
15:14
And then we talked about inflation and we talked about
15:16
performance and we talked about income sources.
15:19
At the end of the day, every plan needs to be reviewed at
15:23
least every year. And #9 and this is kind of my
15:28
rule that I try to live by, and that is simplicity creates
15:33
confidence. Often times what I find in my
15:36
own personal life as well as portfolio is the more things
15:40
that I'm juggling, the more balls that I have in the air
15:42
that I'm trying to figure things out, it starts to kind of eat
15:45
away at me. And sometimes it just makes me
15:48
feel uncertain or lacking confidence.
15:53
And So what I'm trying to say here is sometimes all of the
15:57
complexities sometimes can be very overwhelming.
16:01
And So what are some examples? I would say one example might be
16:06
is if you have multiple accounts scattered, especially in
16:10
retirement, it's really difficult to know with multiple
16:14
portfolios at different locations what 1 portfolio is
16:17
doing towards the other. In other words, is the left hand
16:21
talking to the right hand? Are they In Sync?
16:24
Does one balance out the other? That's one area of concern.
16:29
And if you're using different advisors to help you with that,
16:32
maybe one advisor is very bullish and the other one could
16:34
be very bearish. So they might actually not be
16:38
working together harmoniously. They may actually be acting in
16:42
the opposite directions. Secondly, as you approach
16:45
retirement, as you get closer and closer to a specific age,
16:50
currently at age 73, there's something called the required
16:52
minimum distribution RMD, as we refer to it.
16:56
And the RMD simply says, look, you've been deferring this
17:00
income, IE in your retirement accounts for 73 years or for
17:07
most people, it's been the majority of their life.
17:09
So let's just say you start working at age 2053 years,
17:12
you've never paid tax on that money.
17:15
So eventually the IRS says, OK, Mr. IRA Holder or Missus 4 O 3B
17:20
Holder, you've deferred this income long enough, now it's our
17:24
turn to start receiving income on that, IE taxes.
17:29
So at age 73, they're going to force you to start pulling money
17:32
out based on current law. So what does that have to do
17:35
with anything? If I've got three different
17:37
accounts at three different firms, they each will have to
17:40
calculate what that required minimum distribution is.
17:44
And so it's three separate phone calls, it's three separate
17:47
meetings, it's three separate emails, whatever it might be, 3
17:50
separate checks, three separate 1090 nines.
17:55
And so sometimes just keeping things consolidated and simple
17:59
can make a difference. And the last lesson I want to
18:03
talk about in lesson 10 is purpose keeps people vibrant in
18:08
retirement. I feel like when people are
18:11
working, they do have a purpose. And whatever that purpose may
18:14
be, whether it's they've climbed the corporate ladder, whether
18:17
they've, you know, went out on their own, started their own
18:20
business, whatever it might be. But often times when you're in
18:24
your working years, that's where people are focused on what is my
18:28
true purpose? But once we hit retirement,
18:32
everything changes. Everything changes from the
18:35
standpoint as maybe some of your best friends were your
18:39
colleagues that you used to work for or work with, quite frankly.
18:43
Maybe those colleagues were people that you hung out with,
18:46
went to dinner with, periodically did things with.
18:50
Also, as you worked your way up in the workforce, maybe that's
18:57
part of what your purpose really was, is I want to make a
18:59
difference regardless of what your career is.
19:03
But often times what we find is that when people retire, their
19:08
connections, their colleagues, their friends, if you will, are
19:11
different. So there's this empty feeling of
19:14
saying, wow, now who do I connect with now that I'm
19:17
actually retired? I don't have the same group of 5
19:20
or 10 or 15 friends and colleagues that I used to work
19:23
with. And sometimes, even more
19:25
importantly, they've lost their sense of identity.
19:29
That identity when they were working was part of their
19:31
purpose. And so when that gets pulled out
19:34
from underneath them now, it's kind of like, what is my real
19:39
purpose? And so I put that in as lesson
19:42
10 because I think it's very, very critical.
19:44
And as I've been doing this for now 35 years, I've seen this
19:48
unfold over many, many, many years.
19:51
Retirement is such a beautiful thing.
19:52
And again, I feel like people have worked very hard and I feel
19:57
like as you've retired. And you get this window of
20:01
opportunity to enjoy retirement. Often times people feel a little
20:06
bit lost because of their identity or maybe some of the
20:08
loss of their relationships. And so I encourage you, if you
20:14
are in fact fairly new retired or approaching retirement, to
20:18
take some time and really reflect back not only over your
20:21
career and over your life, but as you enter into this new
20:25
stage, embrace it with purpose. Think of the things that maybe
20:30
are going to give you joy, satisfaction.
20:33
And I'm not necessarily referring to just to do lists
20:35
here. I'm thinking more along the
20:38
lines of what is it when you get to that last stage of your life
20:43
and you're looking back or you're reflecting back in your
20:45
60s and even your 70s and you look back and say, I'm sure glad
20:49
I was able to do this or that or whatever it might be.
20:53
So last lesson is have a purpose in retirement because I've seen
20:59
it over and over again. It'll create vibrancy in your
21:02
retirement. So thank you for watching.
21:06
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