So you're fast approaching the retirement milestone. But how do you actually accomplish retiring? Well, we're about to find out today. Hi everybody, and welcome to another episode of Dollars and Cents, How about Community Credit Union's Financial Literacy Podcast? We have Cameron joining us again today from Peterson Hastings Wealth Advisement. We are going to be talking about something, uh kind of a personal dive because hopefully this gray in the beard tells you that I'm ready for this soon. Not quite yet, though. How does a person actually retire? Like we've talked about what you need to retire, how you can kind of plan ahead, but like you just stop showing up to work one day.
SPEAKER_02It's yeah, it's for most people, it is one of the biggest decisions they'll ever make. I mean, you've been a saver for you know 30 years, 40 years of your career, and now you are all of a sudden a spender, right? And that's that's a big jump for a lot of folks. So when it when it comes to approaching retirement, you know, there's a lot of different considerations that I think a lot of people don't think about outside of I'm not going to work today and every day's a Saturday.
SPEAKER_00Exactly. And I also feel like there's a number of things in your life that you can do and kind of learn on the go uh because you can then apply those lessons the next time you come back to them. But hopefully that's not retirement. You should retire once, not have to go back to work and then retire again.
SPEAKER_02We we like to call it work optional, right? You hit a point where you're only doing it because you want to be there, not because you have to be there.
SPEAKER_00Find yourself an activity in retirement like golfing, or maybe find a hobby and maybe monetize some of that if you're if you want to. Uh supplement your your retirement income. Exactly. Uh speaking of, so uh how do we determine if we're ready for retirement?
SPEAKER_02I think the biggest thing to consider is you know, that first point being, you know, five to three years out. You know, the thought of retirement has crossed your mind, you know, you're starting to think about you know what it looks like when you can retire. That's the first point you should stop and check and say, you know, where am I at today and am I close or ready for retirement? Am I three years out or am I five years out? Exactly. Because at that point, you know, you have the opportunity to uh make an adjustment and still, you know, if it's contributing more, you have the opportunity at that point of at least 100,000 more you could put into your 401k, excluding any type of extra catch-up contributions depending on your age. Um, you have the opportunity while you have a stable income to make those adjustments, you know, pay off any debts that you want to not carry with you into retirement, and make those choices to see, you know, where actually do I want to be on that day that I am fully retired?
SPEAKER_00So we're we're starting to take a look at some different aspects, not just how much am I contributing, how much of my employer match am I going to be taking advantage of, how far above and beyond I'm gonna go with that. But now we're looking at more of our financial picture overall. Do I want to have a car payment when I decide to retire? Is that an expense I want to take with me? Or do I dislike my coworkers so much that I need to retire now and I'm willing to make that extra payment?
SPEAKER_02Really, what retirement is and what it comes down to is making sure you have an adequate budget to you know fulfill all of your expenses and all of your goals. You know, you won't necessarily have that income, but you're gaining income from your portfolio investments, from Social Security, from pensions if you have it. Uh, but making sure that you can comfortably sustain your expense flows in retirement is the key to making sure you have a successful retirement plan.
SPEAKER_00Okay, so we can't just take a look at uh I graduated college, I no longer have to budget so that I can eat, you know, more than just ramen in the last semester, uh, to uh I'm a young professional and I'm budgeting because I want to be able to afford this car or set aside money for this vacation, uh, eventually buy a house, those type of things. We're still budgeting. This is a lifetime uh skill that people are going to need.
SPEAKER_03Yes.
SPEAKER_00Is it more or less important in retirement to be a conscientious budgeter than it is leading up to retirement, would you say?
SPEAKER_02You know, it it depends. I think leading up to retirement, making sure that you are very conscious of the decisions you're making is going to be really important to make sure that you can get that goal, whether it's retiring at a certain age or retiring at a certain value. You know, each person has their thing that makes them tick that they want to hit that mark. Uh, but you know, it also, on the other hand, is making sure that the budgeting and retirement, you can comfortably afford your lifestyle that you want to live without you know running out of portfolio assets or running out of that income-driving source for you.
SPEAKER_00Nothing like suddenly realizing that you've got unexpected longevity and and no money and you have to go get a job when you're 80 years old. Exactly. Exactly.
SPEAKER_02And that's what we want, we want to avoid that. Like I think, like you said, we want to make sure you retire once and you don't need to go back.
SPEAKER_00Now you did mention something earlier uh as far as we don't have that regular income anymore, and you mentioned a number of items. Uh what exactly are we looking at as as we hit retirement? What is our income at this point in time? We've been setting it up our our entire career.
SPEAKER_02You've been diligently saving up until that point, really, where the income shift is, is you're stopping W-2 income from your employer and you're starting to draw on your portfolio assets that you've built up. You know, that's going to be your 401ks, your IRAs, Roth IRAs. Um, some folks might have a pension option through their employer that they've earned throughout their career. You know, you'll have pension income coming in. But for most folks, that majority is going to be that portfolio of assets that they've saved up until this point to begin drawing on in retirement.
SPEAKER_00So when we do this, do we get to uh set this up like a like a direct deposit with our employer where we don't have to regularly go pull out money from these investments? We can set a regular draw that happens.
SPEAKER_02You certainly can. Uh most folks will end up setting it on a monthly contribution from the, or I guess distribution at that point, contribution into their checking like they would receive from a uh payroll. Uh, but it's a distribution from their portfolio of assets. Um, you know, a lot of times that is a monthly draw, whether it's on the first of the month or the 15th of the month, but it really depends on how that person wants to set it up. Now, the important thing with those distributions is making sure that you're covering the taxes on course, yeah. So the other side of that coin is you know, on your payroll um that you're getting, you're having taxes withheld automatically. Well, in retirement, you're gonna have the option to customize that tax withholding.
SPEAKER_01Okay.
SPEAKER_02And so it's important to make sure that depending on the assets that you're drawing on, if it's pre-tax assets being in a 401k or an IRA, that we're withholding a little bit and sending it to the IRS to prepay those taxes for you.
SPEAKER_00So you're not allowed to retire from the IRS.
SPEAKER_02No, unfortunately, the IRS doesn't go away in retirement. That coworker, you know, in that situation might, but the IRS is always going to be the coworker that you're beefing with.
SPEAKER_03Yep.
SPEAKER_02Um But you know, making sure that you're setting that up so you don't get that unexpected tax bill at the end of the year in retirement.
SPEAKER_00Now, how much you did mention pre- and post-tax dollars. So some of these investments that we've made have been uh done with the intent of lowering our income today so that we're hopefully paying a little bit less in taxes with the knowledge that we're pulling that and going to have to pay those taxes later. Yes. And then others where we're investing those after we've already paid the taxes on them, so they're growing tax-free when we pull from them. How much of a calculation is it to figure out how much you're taking from each of those portfolio pieces in retirement to supplement or to create your new income?
SPEAKER_02You know, really you want to look at where your estimated expenses and distribution needs are going to fall. You know, if you have the opportunity to draw from two separate tax buckets, uh per se, you know, being the the Roth or the post-tax assets and the traditional or pre-tax assets, um, you will want to find a blend that might keep you within a certain tax bracket threshold. Okay. Um, you know, if it's 12% that's you're targeting, you want to make sure that you're drawing enough of the the post-tax dollars to keep your tax wealth down. If it's that 22% or between that and the 24%, you know, working with that special tax calculation to figure out how much income can you realize and recognize in the calendar year to make sure that you know you're not going to underwithhold and have that tax bill.
SPEAKER_00Yeah, and uh end up with that lovely bill that you get to pay come come March time frame.
SPEAKER_02Exactly. And it's gonna depend too on on each person's situation, whether they're married filing jointly or a single file or whatever tax status um they are. So it's gonna be a little bit of a variance there. You know, I don't expect individuals to go out and start crunching the numbers on their own. I'd say consult with a tax professional at that point. Absolutely.
SPEAKER_00And make sure that that you can be on track. And we've had uh guests on previously who talk about some of the retirement resources for tax prep that exist out there. So uh if you haven't, go back and take a listen to those episodes uh and use those resources, free resources out there for the community to help you plan and file your taxes in retirement because that's a a different game. Yes. We're not just walking in and being like, here's my W-2 and that one uh discount or or deduction that I've got going for me. Now we're looking at a bunch of different income sources, compiling potentially a bunch of different documentation to prep that for our good friend Uncle Sam.
SPEAKER_02Yes, yeah. Yeah, making sure you have your ducks in a row there is is gonna be really important. So kind of circling back to your original question on you know, why and how should I should I distribute these assets, you know, you'll want to make sure that whatever assets that you're distributing to, you're doing it at a sustainable rate in retirement. And that kind of flows into that budgeting discussion on making sure that you aren't over-distributing from those accounts to where you know they'll start to draw down over time and maybe you risk you know running out of assets in that longevity scenario.
SPEAKER_00Yeah, at this point, we're still earning interest on these uh retirement accounts that we're drawing from. We're gonna slowly deplete them, but they are going to earn. And yeah, if if we decide to take all of it out at once, it's not gonna earn any interest. We're gonna get a big tax bill, hopefully. Yeah. Uh, if we don't get a big tax bill, we didn't do a good job of saving leading into retirement. Exactly. So we've got uh income coming in from uh hopefully social security, potentially pension, our uh retirement accounts. Uh what else might people be doing in retirement to earn money?
SPEAKER_02A lot of folks will have a hobby job. You know, maybe they've worked a corporate career up until this point, but you know, they in retirement want to work at a flower shop or want to do something that just brings them joy, um, whether it's you know volunteering at a nonprofit or having that that kind of hobby job. Yeah we see that as a really common way to you know spend time in retirement. A lot of people have a hard time with the amount of time that they have all of a sudden, you know, without that kind of daily structure.
SPEAKER_00You can only play so many rounds of golf before you're like ow, walking or even riding in the cart. I need to take a break.
SPEAKER_02My my favorite story is you know, there's there's people out there that they say, I want to golf every single day in retirement, and you know, that's gonna be my my retirement hobby. And they get one year in and they say, I'm not getting any better, and I hate golf. Well, now we have to adjust, right? That's where you know, from a budgeting standpoint, from a goal setting standpoint, we have to figure out okay, what does your retirement actually look like now? Because we want to shift gears here.
SPEAKER_00You've enjoyed this hobby because you've only dabbled at it. Now you're going to go quote unquote semi-pro and you realize the truth that golf is just a good walk ruined. Exactly.
SPEAKER_02You end up with a sunburn too.
SPEAKER_00But being able to turn a hobby, uh flower arranging was was the one that you brought up there, uh, into a a part-time uh career, I guess, secondary career, retirement career, uh a fun job to help pad your budget and be able to uh go out and afford extras beyond what you budgeted from your retirement accounts.
SPEAKER_02And that that side career, that that retirement career is becoming more and more common where a lot of people, you know, as humans, we like to have a goal at the end of the day. We like to have a structure to our routine. And so when you lose that structure in retirement, you know, a lot of people can kind of struggle with that. So what we're seeing it more and more where, you know, whether it's volunteering, whether it's you know, a side job, whether it's something they've always wanted to take a look at, um, or maybe it's the same job you've been doing, but you move to a more of a part-time scenario. Maybe you're working, you know, 15, 20 hours a week or on a consulting basis to have some of that structure in your routine still, have a little bit of that extra income, but know that again, your work optional, right? Yeah. At that point, you don't have to do it.
SPEAKER_00You're doing it because that's transitioning into doing less and less, which is my goal every day. Uh I mean, I could also imagine people that are that are wanting, because another thing you probably hear from a lot of people is we want to travel. We're gonna go travel the world, we put all this money away, we're gonna sell the house and buy an RV, and we're gonna hit all the national parks. Or uh, I have learned that you can do uh all-inclusive cruises this many times a year. It will cost this much, and that is my only expense. And now I'm going to be a travel blogger. Uh however that pans out, and whatever you want to do, you've got to plan ahead for that type of a thing early on to determine. And you mentioned that kind of three to five year range. Yes. For you and for retirement wealth advisors, when is the most important and the most busy time in planning for these? Is it early on when you're convincing them put this money away, or is it in that three to five year span, or is it managing them after the fact and being like, yo, you gotta slow down a bit?
SPEAKER_02It's a little bit of all of it. You know, I I would say it is kind of cyclical depending on the time of life, the stage of life that you're in. You know, there's a lot, um, and there's always gonna be an and it depends, right? Whether it's uh you know, for that individual if they have a lot more heavy lifting they need at different times in life. But typically and traditionally, you know, when you are approaching retirement, that's where we're gonna be the most active of making sure that we can work with that client and help them set those retirement goals and show them here's exactly what it's going to take. Really that that five the three to five year range, you know, what's it going to take to reach those retirement goals? And we can make some adjustments now to make sure that we can get there. You know, as we approach retirement, as we get closer, that's where again we're going to uh you know, at this point, maybe one year to six months out, we're gonna be pretty active in there, making sure that everything is set, you know, working on the administrative work necessarily to um, you know, facilitate that retirement, whether it's rollovers and consolidation of former 401ks into your current 401k or in into an IRA, um, working with pension paperwork or working with the Social Security office to making all the final choices so we're avoiding fees.
SPEAKER_00Not retiring and suddenly realizing, oh, we got a month worth of effort that we got to put in before I can pull something here without a big fee attached to it.
SPEAKER_02Exactly. And I think the next one is it's a common misconception that you know once you're retired, it's you know, not a lot of work. Oh, this is a retiree, they don't have a lot going on. We just stopped working. That's the point. That is so far from the truth. I'd say the first year in retirement is a highly active year because you're settling into entirely different cash flow. You're settling into odd, you know, you're on a fixed income now from your portfolio assets and from Social Security. You have an entirely different budget in retirement based on those goals that you've set, whether it's going on the cruises or traveling more or you know, seeing it all 50 states. You know, we're making sure that those expense flows can be met in retirement. And you know, on the hobby side, if hobbies are shifting around, that's where expenses are gonna shift around too. But that first year in retirement's crucial because people are still figuring out what they want their retirement to look like and making sure that they want to continue with that path. So there's a lot of fine-tuning, a lot of adjustments during that period where I like to be meeting with folks, you know, at least every three months during that first year of retirement to make sure that they're staying on track on the budget that they've set, uh, they're staying on track with the goals they've set, and making sure that just as humans, they're doing all right with that big jump.
SPEAKER_00Yeah. Well, I I can imagine how certain hobbies you take a look at uh during your your current day-to-day or month to month, however you want to look at it. You know, like I spend this much doing this hobby that I love. Trading card games, Warhammer is an extremely expensive hobby that a friend of mine is getting me back into. Um, but all of a sudden you realize that you're not spending 40 hours a week not doing this hobby. All of a sudden you've got more time, which means you can be spending more money on it, which means all of a sudden your hobby costs have gone through the roof. Three months is a great time to be like, hey, slow down. Maybe, maybe reevaluate this a little bit.
SPEAKER_02When you have all that free time for all the extra research into a hobby, too, that rabbit hole just gets deeper and deeper, and then all of a sudden it becomes a lithium mine of a rabbit hole. Oh, yeah. So it's uh agreeable that yes, you you certainly you want to have those check-ins, make sure they're they're on track.
SPEAKER_00So for for people who are working towards this retirement, we mentioned three to five years is a great check-in time initially. That first year after retirement, very active to make sure that people are capable of being disciplined. Uh, how about around 10 years out to retirement? Is that a a kind of a pivotal time frame where you're looking at like, hey, we need to get you ready for that three to five year range, or are we still in cruise control right there?
SPEAKER_02We're we're still an accumulator at that point. You know, your goals are, you know, you're 10 years out from retirement, you're not really thinking of it too actively, you know that you want to retire at some point. That's where you're gonna want to make sure you're kind of on cruise control on the contribution side of things, but making sure that you are hitting your marks for the contributions and for the savings.
SPEAKER_00Those standard regular check-ins be like, do we need to make those minor adjustments here and there?
SPEAKER_02Exactly. It's it's a little bit of fine-tuning here and there. Um, goals are still developing, life is still developing at that point. Uh, but really the at that stage, about 10 years out, you're still you know wanting to put away as much as possible. It's a great check-in point though to just see where you're at. Yeah. You know, see where's my portfolio at, you know, where's my 401k at? Where are my expenses at, my debts at? Um, what are my short-term goals that I want to hit before retirement before it starts to become uh more of the the numbers game and crunching the calculations?
SPEAKER_00And then after that first year of retirement, you're pretty confident that most people have settled in. They've they've got a year of this under their belt, you've had enough opportunities to correct bad behaviors uh or help reinforce good ones. Uh how often are you checking in with your retirees uh after that?
SPEAKER_02I like to assess the plan at least once a year, still, every year throughout retirement, because you know, life can shift very quickly. Yep. Um even though retirees aren't aren't shifting too quickly, you know, life life can throw things um for for a loop and make sh make it so that um plans can change, right? Yeah. Um so at least once a year to make sure that we're checking in on the financial plan. Uh for a for a regular check-in at that point, I'm kind of leaning on that particular individual. You know, some folks like you know, they like to say, Hey, I'm seeing too much of you. I want to go out and play my golf every day. And I say, Great, let's check in once a year or you know, twice a year. Spare me an hour, we'll take a look and make sure that you can continue to go. Play golf every day. Exactly. And some individuals are more on the opposite. They want to be very active throughout their retirement to make sure that things are on track, just to have those regular check-ins.
SPEAKER_00That's kind of the same as like budgeting personalities, where the people that we've talked to are like, I check my accounts daily. I want to know where I'm at every day for my daily spending here and there. And others are more like, yeah, I'll check the balances once a month and make sure that everything looks like it's pretty much where I think it should be.
SPEAKER_02Yeah, it's that that mindset doesn't shift, right? It does doesn't go away. You can't have, you know, 30, 40 years of your career as a saver, or if you've been very frugal or you've checked things every single day. Uh although I don't recommend checking every day. Um, I tell folks, you know, don't look at this, maybe try and look at it maybe once a week, or just to get a feel for it.
SPEAKER_00Yeah, it's like that weight loss journey. You don't check the scale after every meal. That's just gonna be depressing. Check it at the end of the week, you'll be fine.
SPEAKER_02You just that consistency is important, but the everyday is where it becomes a stressor in your life. Um, but you know, that like I was saying, that mindset doesn't go away. Just because you've entered retirement, you've entered a new stage, it's not going to alter the brain chemistry. It's not gonna alter the decision tree that you've had for the last 30 to 40 years just because one thing has shifted. And so carrying forward that that budgeting mindset, you know, you are gonna have those that are very frugal throughout retirement. You're gonna have those that want to increase their expenses in retirement and live a little bit more lavishly in retirement. Um, and so it's finding a method for each of those individuals to make sure that their goals are being met in the best way possible to succeed for their retirement planning.
SPEAKER_00I mean, and part of that could be how much you want to leave behind uh when it's time, whether you want to have a good inheritance for your kids or whether you want to leave them with nothing so they can pull themselves up by their bootstraps.
SPEAKER_02I just I just heard a great term. Uh I don't know if you've heard it yet, but people say they want to ski more in retirement, and it stands for spending kids' inheritance. And I I this was the first time I had heard that one, and I was like, oh, this is this is good. I'm gonna remember that one.
SPEAKER_00That's right up there. My my dad, when he was approaching retirement, bought a boat. Not a big boat, nice little aluminum fishing boat, but he named it Chris's tuition. And Chris is my younger brother, and he was getting ready to be in college that year. Uh, and and so Chris's tuition was out on the river uh a decent amount of time. Uh oh, that is awesome. So, with uh with all of our our structures, we've got uh some other things that we need to be aware of. We've mentioned this a little bit, we've touched on it a bit. Um, social security is one of those things that when you start taking it matters. Yes. Uh how do we make those choices on when we want to do it? How often do you have uh people out there that are like, I'm going to retire this year, but it's only going to be like three years, then I'll start doing this other thing and have some of those adjustments that they're making to their income streams?
SPEAKER_02The when it comes to Social Security, there are a lot of different directions you can take it. You know, especially if uh, for example, you are uh married and maybe there's an age gap. Well, then all of a sudden there is a lot more nuance to social security strategies. So I wouldn't say there's necessarily a one size fits all approach. In general, you do want to wait till at least age 67. You know, that's your full retirement benefit. From age 67 until age 62, which is your earliest you can take it, you're gonna have a decrease in Social Security benefit. They're gonna take a little bit of that primary insurance amount, your PIA amount, which is your full social security amount, they're gonna take a little bit of that away. So, you know, I like to say if you're going to take Social Security, take it at that full retirement age so that you're not getting it taken from you, right? You've contributed in into Social Security up until this point, you would want your full benefit.
SPEAKER_00So if I take it at say 65, I'm going to lose some of that benefit. They're not giving it back to me at 67, are they?
SPEAKER_02No, no, it's that's once it's in, you're you're locked in, it'll adjust for inflation um each year, but that's your benefit. So, you know, that's not to say you can't take it earlier, because there are strategies that taking it early makes a lot of sense and makes more sense than age 67. But when we're talking in general, 67's your your full amount. Now you can wait until as late as age 70 to take it, and you have a guaranteed increase on your primary amount of 8% each year up until eight age 70. Okay. Um, you know, when you're looking at say longevity as a consideration, it that's where you lean into, okay, maybe it makes more sense to delay social security because I have a lot of longevity in my family, um, I'm not don't have any health concerns. And so I can wait a little bit longer for this higher amount. Because to most folks, if I if I offered them, hey, here's a risk-free 8% return every year, you know, that's a very healthy return.
SPEAKER_00Yeah, I think we need to talk more about this later.
SPEAKER_02I wish I could I could say that to everybody, but it's it's you know, it is a very healthy return you're getting on that later, you know, your latest delay credit at 70. So when it comes to Social Security, there's this broad spectrum of things, and and you touched on it already, but that's a permanent decision. Once you start Social Security, you know, that is your benefit and it's going to be ongoing. Now you add in other variables like a spouse that you know has a uh larger social security benefit, or um maybe there was an income disparity throughout your lifetime of earnings into it, and one of your benefits is going to be smaller than the other. Well, now there's uh extra strategies in there to, you know, maybe one spouse starts it a little bit early and the other waits till their full retirement age at 67 to have a little bit of bridge income in the meantime, and then once that larger benefit starts, you know, you that spouse that's already been taking social security and might adjust to the spousal social security benefit, which is gonna be one half of the highest earning spouse's benefit. Okay. Um, depending on if that's a higher benefit than what you're currently getting. So there's a plethora of different options out there for social security. When it comes to, you know, the the decision of when should I do this? Consult with an advisor, you know, consult with a professional because they're going to make sure that you have all of the information necessary to make that informed decision on your social security and make that decision with confidence.
SPEAKER_00And that's the type of thing that you're probably discussing and planning in that three to five year window.
SPEAKER_02Yeah, it it's within that three to five year window, depending on um retirement age too, it's it may even be after retirement. You know, social security might be uh planned on up until that point at 67. And then maybe as we're getting closer to retirement age and into retirement, maybe they're still not drawing yet, we can start pulling different levers and saying, okay, well, here's what it looks like if we wait a little bit longer, or you know, here's what it looks like if we like took it.
SPEAKER_00If you're feeling like your budget's a little tight right now, we can take it early. If you're feeling comfortable, we can wait until this other time you're gonna get that better benefit after the fact. And unless you're planning on doing a bunch of extreme sports or skydiving in your retirement, being able to take a look at that longevity aspect might matter a bit more.
SPEAKER_02Yes. Like I said, too, it it comes down to a series of cash flows in retirement. So if you have the means to sustain your retirement and meet your goals without the social security, well, then that's where, you know, maybe you don't need it till age 70. Uh, but if if you are required to take that social security to meet your needs, that's where we're gonna lean on more on taking it earlier to make sure that we have that supplement to the the budgeting to go back to college lifestyle eating nothing but ramen in retirement.
SPEAKER_00Exactly. Though some people I know in retirement would love to relive their college days. Uh so with the the other aspects that we've got here, um with our other cash flows. We're looking at say 401ks, IRAs. Are we just setting up draws from those, or is there other shifts and adjustments that we're planning to make with those investments?
SPEAKER_02There are other shifts and adjustments. There are certainly things to consider, right? One being um, you know, at a 401k, you know, depending on your age you're retiring, there's some special rules on if you retire with that 401k, you can draw from that 401k, and now you have to retire at the year you you reach 55. Okay. But if you retire at that year between 55 uh and 59 and a half, which is the standard you know withdrawal age for a qualified retirement accounts, to not have that 10% early withdrawal penalty. Okay. That 401k, you could do it at 55 and draw from the 401k without that early withdrawal penalty associated with it. So there's some added strategy depending on A, your retirement age that is your target, uh, B, what your intent is on the funds, and C your your tax side. So the intent being, you know, 401ks, for example, um, maybe you're charitably minded and you want to make um qualified charitable distributions later on or QCDs. Um you can't make a QCD from a 401k, but you can from an IRA. Okay. And so that would be an added benefit of rolling that 401k over into an IRA at that point. Um otherwise, on the tax side of things too, uh, there are benefits to rolling over the 401k into an IRA when you are getting ready to make those withdrawals. Um, because a 401k with cash withdrawals from it, typically you're gonna have a mandatory 20% tax withholding on those from a 401k plan. Whereas an IRA, you can have a little bit more of a custom tax withholding on it. So maybe you only need to withhold 12% based on your income and you know the tax bracket you're in. Well, why would we want to withhold 20% from my 401k just to get it back at the end of the year when I file my taxes?
SPEAKER_00Because everybody loves getting that big tax refund check, even though it's a low, it's an interest-free loan.
SPEAKER_02It is, it's an interest-free loan. Whereas if you're withholding the 10, there are the 12% on the IRA, that interest you're saving that you would have given to the government for free can still be growing for you for your retirement and to reach those goals. So, you know, there are different strategies, you know, and why it's important to have that account type set up for you know each of your goals. Um, the other benefit there is consolidation, right? Yeah. A lot of folks in retirement, they aren't going to want to manage four different accounts from four different former 401k providers or different IRAs. Having everything in one spot with one login, they can go and check or initiate a distribution if they need it, or set up those monthly withdrawals from. Uh that's gonna be a great strategy for them to keep kind of their head on straight for their administrative tasks in retirement.
SPEAKER_00It's kind of like the retirement version of a consolidation loan where you're taking all of your debts, putting them into a into a single, single location with a a nice, hopefully lower uh interest rate, but now you've only got one payment that you've got to focus on making. In this particular case, we're going the opposite. We're taking that, consolidating some of those maybe into a higher yield or uh just a single location where all we have to do is pull from one source, yeah. We don't have to suddenly break out the calculator to be like, well, if I take 400 from here, 1200 from there, and I got social security of this amount.
SPEAKER_02Yes, yes. And and kind of along the same lines, like the you know the debt consolidation, when you're consolidating former retirement accounts too, each of those different accounts is invested along the way. So you're gonna have four different investment strategies in those accounts because the funds might not line up all the way. Oh, yeah. So it's consolidating it into one cohesive, concise investment strategy, too. Um, so that's a great way to make sure that your retirement plan and your growth projections and your goals are able to be met by having a very well-structured, you know, investment goal. Because you could have one 401k and maybe it's way too aggressive for you. You could have one that's maybe too conservative. Once you have it all in one account, however, that's where that aggressive and that conservative are gonna kind of blend together and find that overall um mix to make sure that your risk tolerance is gonna be in line with your goals. And again, that's where working with an advisor comes in. They're gonna be able to help identify those different risks and help work with you based on your risk tolerance to find, you know, how should these accounts be invested now that my goal is no longer just saving, now it's maintaining these assets and making sure these assets don't run out, you know, throughout my retirement.
SPEAKER_00All right. So you we talk risk tolerance here, and that just has my head spinning back to skydiving, uh, which is a completely different type of risk tolerance that we're talking about. But it does bring to mind something else as we move away from being employed with an employer who is covering all of our benefits and uh moving into obviously high-risk hobbies, uh, what are we looking at as far as the replacing the other aspects that our employer gave us, like dental coverage, healthcare, vision? What do we have as we shift that?
SPEAKER_02Yeah, that's a great question. So when it comes to insurance coverage, you know, that's that's another one of the biggest things that we get asked, you know, when people are approaching retirement. You can maintain your employer coverage through Cobra coverage for up to 18 months on your standard retirement amount. Uh, but the problem with that is your premium, your insurance benefit, can be up to 102% of your benefit uh premium that you had prior. So it can get really expensive maintaining that coverage in that first year of retirement. And obviously at only 18 months, that's not exactly our long-term plan. No, that's that's not the long-term plan. Um, a lot of the time we see it as a bridge depending on retirement age, because at 65, that's where Medicare starts. You can enroll in Medicare and you'll have your Medicare premiums, um, your coverages through through Medicare and through the Medicare Advantage plans, depending on how you navigate the the Medicare space. Um But a lot of the time we'll see that as a bridge period. Maybe they're retiring it at 64, and so they need that coverage just for one year. Now, when it comes to earlier retirement, that's where you're gonna have to look at the private, you know, private insurance space for those coverages. So a lot of the time, you know, given that individual maybe they're five years out from retirement, but their goal is retiring at say 55. Okay. Well, that's gonna be where we want to plan around and build into their plan for their plan success um a bridge medical expense, anticipating high cost of out-of-pocket medical coverage in those bridge years until age 65 when Medicare kicks in.
SPEAKER_00Yeah, and it sounds like that's a much better plan than I would have come up with, which is investing in bubble wrap and uh staying home uh just to avoid all of the injuries and everything else that could come about.
SPEAKER_02And if skydiving is the hobby, it's it's making sure you buy the best parachute possible.
SPEAKER_00So we've got our our health insurance, our our situation covered. We've made some choices, we plan for that in in our retirement planning. And if we're lucky enough to retire at 55 with those things, hopefully everything's good to go. We're moving forward. I'm assuming this is all part of the calculation of how much can I spend during retirement? What's the average that people or the method that they go through determining where they want to be with that?
SPEAKER_02Yeah, that's that's another great question. I mean, really what question we get the most as advisors is how much do I need to retire? And you know, when can I retire, right? But there is there's decisions that need to be made to determine, you know, what are your limits, what are your tolerances. The general rule of thumb, when you're kind of backing it in from your budget, I would start with your expenses, figure out what you estimate your retirement expenses to be in retirement. Figure out what you would anticipate your retirement expenses to be ongoing. Yeah. You know, and then from there, you're gonna figure out your supplemental income streams. Figure out your estimate for Social Security, you know, if it's pension income, if it's uh second job in retirement or you know, maybe part-time work. What are the other income flows? From there, you're gonna be left with a gap, right? This is how much of my expenses can't be covered through my other cash flows. And that's gonna be required to have the portfolio withdrawals kick in to cover. The general rule of thumb is about a 4% withdrawal rate from your retirement assets is going to be a sustainable rate for making sure that you're never dipping into the principal of those assets and you're just living off of the uh interest and the growth of that account. So say you have you know $500,000 in an account at that uh 4% withdrawal rate, that $500,000 is going to stay consistent throughout your retirement. That would be the amount that you could leave as an inheritance to children or ski on, or ski on, or you know, give to a charity, you know. Um but making sure that that 4% can cover those expenses. So say you've got a million-dollar portfolio, you know, that 4% healthy rate of return um on a withdrawal side of things, that's gonna be about 40,000 that it would supplement in excess of your um Social Security, pensions, other portfolio draws, you know, that's where we have uh that breakdown. Um so leaning into the overall, you know, how much can can come out, making sure that whatever risk you're running in the portfolio, and that 4%, it's not for everybody. Each person might have a rate of withdrawal that's you know, maybe it's six percent, maybe it's eight percent for the first three or four years of retirement. You know, it's not necessarily a even you know, it's not necessarily a even distribution curve of those uh portfolio withdrawals because there's an anticipation that earlier on in retirement you might have a little bit heavier withdrawal rate than later on. Okay. Um and again, that's where working with um a professional to help determine, you know, if I am withdrawing this amount, what does that actually mean for my planned success? Because we could have a goal of you know buying that RV and retirement. But if that RV is a you know $150,000 portfolio hit, you're gonna miss out on that extra $150,000 of portfolio growth throughout your retirement. So it's making sure that whatever is coming out is gonna be sustainable for you know that individual and that retirement plan.
SPEAKER_00Okay. So I feel like that gives us a lot of structure that we can look at. One, we know like if we're gonna have a mortgage payment going into retirement, we know what that mortgage payment is going to be. Uh, if we've got a car payment, we've got a pretty good idea when those payments are going to cease happening. And we can kind of plan ahead for what those are. The the how much can I spend question is an interesting one because that's a different look at it than I think a lot of people would take. They might be looking at if I've got all of this money, how much, how much should I budget to go do fun things, as opposed to how can I keep my portfolio sustaining itself while in retirement and then working within that number.
SPEAKER_03Yes.
SPEAKER_02Yeah, you want your assets to work for you, right? You don't want to look at your retirement accounts of, you know, oh, I've had this 10% early withdrawal penalty. I can't draw from these accounts until 59 and a half. And once that age comes, you don't want to look at it as, oh, I just have this pot of cash. I can just use this whenever I want, and I can go out and buy a new car, I can go out and buy a new boat, I can you know, look at it almost like a like a lottery w winner, you know, where you see, oh, all of a sudden I have this lump sum I have access to. Yep. You know, you want to make sure that you have a plan for those those assets to make sure that they will last to reach your goals, whether it's inheritance for uh children, whether it's travel, whether it's you know, extra activity, you know, whether it is a a purchase in retirement. But making sure that you aren't going to go through those to where you find yourself in a situation later that should you have extra longevity that maybe you didn't expect or maybe it didn't run in the family, um, that those those assets. Don't run out.
SPEAKER_00And I think this comes back to once again that budgeting concept of you've you've got your budget. You can budget all those fun things in as well, and then take a look at how that impacts the future projections of your portfolio throughout those years. You can take a look at like, hey, if I do pull this much out five years into retirement to buy that that RV, how is that going to impact like the future projections of my accounts as and the budget that I've got because we're taking out $150,000 and now that 4% that we're talking about drops? How does that impact the future? Is it going to be better or worse? Is it going to cover the gas cost? Uh, or maybe by that time we've got electric RVs. I don't know.
SPEAKER_02Uh yeah, I I think too. I I think a budget doesn't have to be scary in retirement because you know, retirement is it's about fun, it's about relaxation. You know, you have worked so hard to get to retirement, and that's a very important thing to make sure that you're not stressing in retirement. That's the benefit of that budget in retirement. Is you are eliminating the variable of stressor, of uh plan um that isn't going to be successful. Right. You're taking that that initiative to say, hey, I'm gonna stay within these rough boundaries. Now you don't need to track every single dollar in retirement. I wouldn't expect any retiree to track every single dollar, let alone unless that's their hobby. Unless that's their hobby. Unless maybe they're a coin collector, right? Um But I would expect I wouldn't expect that that level of scrutiny, but making sure that there is a a rough plan, right? Staying within a certain range to make sure that you're successful, whether it is that 4% withdrawal rate, whether it's uh a dollar figure that that you've come to determine is this is my safe, healthy dollar number that I can withdraw in retirement. And knowing that things are gonna change, and that's where you want to have just regular check-ins because retirement isn't as linear as uh a lot of people think. There are things that can come up, there's different goals, different priorities. All right.
SPEAKER_00Uh last conversation here. Do we want to give any real good advice for people out there? Uh, and let's categorize this for a couple of different age groups. The young folks that are just starting their professional career, people like myself who are um very young and moving towards uh our retirement and our career, the people that are right on the precipice, and then the people that have retired.
SPEAKER_03Yes.
SPEAKER_00What's your what's your one piece of advice that you would give to each of those groups of people listening?
SPEAKER_02So starting with the people that are just starting their career, put as much as you can into your 401k, into your retirement savings. Um put as much as you can as early as possible. Yep. Right.
SPEAKER_00Ideally the early returns calculate and they compound year after year after year. Exactly. And you're gonna want all of that base layer for that 4%.
SPEAKER_02Exactly. You know, the and jumping up to the next kind of age group, those those people that are established in their career, maybe they're still a little bit out from retirement. You know, that's where I would say that's your first break point of take a look at where you're at and what necessary paths there are to get you to your retirement goal. So, you know, take a look at your portfolio assets, uh, take a look at your 401k savings rates, take a look at any debts, you know, whether there is auto loans out there, whether there's um, you know, mortgage, you know, maybe you're at a higher interest rate, maybe it makes sense to refinance somewhere down the line. Uh, but take a good look at and use that as kind of your first baseline. All right, here's where I'm at now. You know, I've been focused only on saving up until this point, but now is my first check-in.
SPEAKER_03Yep.
SPEAKER_02Um, you know, here's where I'm at. What do I need to continue this path? A lot of the time that's going to be, you know, added 401k withdrawals if they're not maxing out yet. Um, if that individual is age 50, it's making sure they're taking advantage of the extra savings contributions that can go into those 401k plans and those IRAs for that that catch-up contribution that kicks in.
SPEAKER_00Do we need to adjust our cruise control a little bit one way in order to hit those goals?
SPEAKER_02Yes. Um, then that next group of folks that maybe they're they're right about at retirement, that's that next catch point where you have you know a couple years maybe to make some last adjustments, but you're starting on that really fine-tuning level of the financial plan. At that point, you're taking a look at where are my income flows going to come from? Uh, what does my tax situation look like? What are my accounts out there? You know, maybe you're starting to do some consolidation to kind of clean things up a little bit.
SPEAKER_00The portfolio picture is probably pretty solidified at this point in time. And now it's just how do we mold that to meet the goals for retirement?
SPEAKER_02Yes, it becomes a little bit more administrative on the different items out there. But at that point, you know, you're not necessarily just at your check-in point, you're at your check-in where you're gonna start grabbing all of these different outside things and pulling them in to one to make sure that you can make those decisions on each and every one of those different facets that's going to affect your retirement. You know, that next jump is gonna be those retirees. You know, the most important thing at that point, A, have fun, you've earned it. Um, but B, make sure that you are staying on track. Make sure that as goals are shifting, you're having that communication with your advisor, with your spouse, um, whoever is helping you guide those financial decisions, um, and knowing that things are going to change and shift, uh, but making sure that you're on track from a spending level, that you aren't at a withdrawal rate that's going to become unsustainable later on in life. Because most withdrawal rates are going to be sustainable for that first you know kind of period of time, and you might not think about it. Um, you know, we were talking before uh we started on, you know, if you have a million dollars and you're spending uh $10,000 a month, and assuming it's not growing, well, that's $120,000 a year, and that million dollars is only gonna last you eight point three years. Yep. Right? And so you might not be thinking about it because it's a 10-year window, that's a long time. But all of a sudden you're at that ninth year and you're saying, Oh, wow, my my account balance is almost gone. It looks like I've got to uh unretire and go through this again. Um and so you want to make sure that those reasonable goals, those reasonable distributions are going to be sustainable through retirement. Okay. So focusing on that in retirement, it's gonna be really important.
SPEAKER_00And having a really good relationship with whoever is packing your parachute if you're a skydiver. Uh Cameron, thank you so much for joining us and going through uh the different stages of retirement, the planning that people uh typically don't consider because the question is always how much money do I need and when, as opposed to what do we do with all that when the time comes. Thank you for helping enlighten us and uh our listeners today on this one. And until next time, this has been Dollars and Cents, Have a Community Credit Union's Financial Literacy Podcast.