Retirement For Life

The Art of Spending Down: 3 Retirement Hacks to Boost Income & Cut Taxes - Ep 41

• Christian Cyr, CPA, CFP® • Season 2 • Episode 41

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The transition from saving to spending in retirement represents the most challenging and risky part of your financial life, requiring strategic planning to avoid running out of money. We break down three critical "hacks" that can transform your retirement security by reducing market dependency and increasing guaranteed income sources.

• The "spending less when we're older" myth often ignores the significant impact of inflation
• Traditional 4% withdrawal rules leave 60% of retirement income dependent on unpredictable market returns
• Sequence of returns risk can deplete retirement accounts decades earlier than expected if markets decline early in retirement
• Hack #1: Optimizing Social Security timing can increase guaranteed income by tens of thousands annually
• Hack #2: Creating "Social Security 2.0" adds another layer of guaranteed lifetime income
• Hack #3: Strategic Roth conversions can virtually eliminate RMDs and potentially save six figures in lifetime taxes
• When implemented together, these strategies can reduce market dependency at age 82 from $100,000 to nearly zero
• The ideal retirement plan front-loads investment withdrawals in early years while building guaranteed income for later years

Visit our YouTube channel for dedicated playlists on all three retirement hacks discussed in this episode.

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Christian Cyr, CPA, CFP®:

This is probably, honestly, the most important topic that most retirees don't understand and when they get into this mindset and understanding what exactly is the most important thing in retirement, this is it right here today Retirement for.

Intro:

Life, your passport to a comfortable and confident retirement. The podcast, that's equal parts education and entertainment, where we break down the retirement maze with a dash of fun and a heap of wisdom from your host, christian Sear, cpa, the passionate retirement specialist and president of Sear Financial Wealth Advisors. The independent registered investment advisor specializing in the AIM retirement system.

Christian Cyr, CPA, CFP®:

Welcome to the Retirement for Life podcast. We are back today with Emma and Andrea. How are you guys doing Good? Today, we are doing something we have never done before. It's going to be a countdown. We're going to talk about that in a second.

Christian Cyr, CPA, CFP®:

We're talking, though, about spending down money in your retirement. I've often said that the scariest part of your financial life is when you retire. The retirement party feels like a victory, but all of a sudden, no HR department, nobody helping you with health insurance. You're not accumulating assets anymore. You are now trying to figure out how to spend this money wisely. This is probably, honestly, the most important topic that most retirees don't understand, and when they get into this mindset and understanding, what exactly is the most important thing in retirement? This is it right. Here today, we're going to give you the three biggest hacks that we use to help people wisely spend their money in retirement. It's going to be a great show. Now, brooke is going to make sure that this is a 20-minute podcast or less, and we all know that I tend to be a little long-winded, so today I'm not going to talk as much, and we're actually going to be on the clock and starting. Brooke, are you ready, yep, and three, two, one. Start the clock starting, brooke, are you?

Emma Bean, CFA®:

ready? Yep, and three, two, one. Start the clock. 20 minutes go. We get this comment a lot. It's a very emotional thing for retirees to go from saving up money to spending down their assets, and there's many ways to go about it, but ultimately, if you do it the wrong way, you may run out of money. So it's very important, I think. First, let's talk about the biggest comment we get, which is people saying we're going to spend less when we're old, andrea. What do we say to our clients when they say that?

Andrea Brannon, CFA®-IF:

And we tell them that's true, you will spend less money. But at first, when you retire, you have the go-go stage, and then you have the slow-go stage and then you have the no-go stage.

Christian Cyr, CPA, CFP®:

But also we're taking into consideration inflation logo stage, and then you have the no-go stage, but also we're taking into consideration inflation. Well, so, again, if you're listening to this, great, but you should be watching it, because we have some amazing graphics today, and here's graphic number one.

Emma Bean, CFA®:

So if you're looking here, we're going to just pinpoint age 80. So, right off the bat, at age 65, when you retire, let's say, your expenses are around $6,600. At age 80, yes, you are spending money, less money going out.

Christian Cyr, CPA, CFP®:

Spending less for sure.

Emma Bean, CFA®:

Going out for food, traveling less, et cetera, et cetera. But you can see, if we jump over to the right age, 80 with inflation, you're actually spending $3,000 more, including inflation.

Christian Cyr, CPA, CFP®:

Andrea, how many times have people come in and said well, we're going to spend less in retirement, so we don't need as much money?

Andrea Brannon, CFA®-IF:

All the time, every time.

Christian Cyr, CPA, CFP®:

We bring this slide up and I say you're correct. What's the age 80? Is that the slow-go years? In the slow-go years, you're going to spend yeah, maybe 12% less. In the no-go years, you're going to be spending as much as in this depiction 40% less. But don't get fooled Inflation is a larger factor than you spending less. So, with that in mind, what do most people do when they have a retirement plan in America? Their advisor does what the 4% rule.

Emma Bean, CFA®:

Yeah, which means you know we've heard this a lot. You can take 4% out of your accounts every single year, doesn't matter what the market does. If you take out 4%, your account balances aren't going to go down and you'll end up dying with at least as much or more money than when you retire.

Christian Cyr, CPA, CFP®:

It frustrates me because there's so much risk involved there. Here's a picture 30 years of risk. What I always say when I show this screen to people is orange is bad. What is the first of all? What's the blue?

Emma Bean, CFA®:

Social security, so that's a guaranteed income source. That's great, but the orange here is savings withdrawal, so it's pulling money out of your investment accounts, which we want to avoid at all costs.

Christian Cyr, CPA, CFP®:

Right, that's saying that 60% of your spending is dependent on how the stock market behaves 60% of your stock market risk is sitting there, because this is showing you how much you will need and how much of it is going to come from your investments.

Emma Bean, CFA®:

And the other thing I don't like about the 4% rule is you might have to adjust your spending habits. Rule is you might have to adjust your spending habits. Some people go from making $200,000 a year or more to cutting it back, and maybe 4% of your assets are not enough for you to live on which isn't realistic.

Andrea Brannon, CFA®-IF:

People really aren't going to adjust their spending by that much money.

Christian Cyr, CPA, CFP®:

What I don't like is this is the picture that most advisors across America are showing their clients You're going to be fine, you're not going to run out of money. Look, you're taking money from Social Security, you're taking money of investments. And then they show this and this is what you look like at age 82. Because, andrea, people are always asking where is the money coming?

Andrea Brannon, CFA®-IF:

from yes, every time. They want to know exactly what accounts we're pulling from.

Christian Cyr, CPA, CFP®:

So if you look at this fictitious person or couple needs $160,000 at age 82 to live on and this is how they get it right, but they're taking. Most of their money is coming from what? The investments? It's taxable, some of the distributions are taxable and it really comes down to this sequence of return risk which a lot of people know about. And what is sequence of return risk?

Emma Bean, CFA®:

So the real risk here is if you retire one year and the stock market drops in the first few years of retirement, then you're left with a lot less money to live on for the rest of your retirement.

Andrea Brannon, CFA®-IF:

Yeah, absolutely 2008.

Christian Cyr, CPA, CFP®:

And so what we know is that markets crash, and it happens every four to six years, and so what we know is that markets crash, and it happens every four to six years. And so what happens if the stock market crashes here in the first year of retirement? Then the picture looks different.

Emma Bean, CFA®:

And the red here is showing an income shortage. So the orange you know you're spending down your investments and then here, at age 82, your investments actually run out, because in the first year or two of retirement you got unlucky, the market went down and now you are out of money.

Christian Cyr, CPA, CFP®:

I'll say it again when you retire, it begins the most dangerous part of your financial life, and this is the big reason why we don't know the next 2008,. The stock market down went 38%. We're not even showing that here. We're just showing a 30% drop the year you retire, instead of the picture that every advisor is showing in America. Instead, what's really happening here is the potential risk to run out of money at age 82. So three hacks. Let's talk about hack number one.

Emma Bean, CFA®:

Optimizing Social Security. This is probably the most maybe beneficial strategy, and this is we're not going to get into it. We have a playlist where we talk about Social Security.

Christian Cyr, CPA, CFP®:

Go to YouTube channel, check out the Social Security playlist.

Emma Bean, CFA®:

A lot of videos there, but this is just one simple thing where optimizing the age that you take Social Security can really affect where your income's coming from and how long it'll last you.

Andrea Brannon, CFA®-IF:

Yeah, that alone went from 40%, 43% to 65% income stability 90% of Americans are getting the social security decision wrong.

Christian Cyr, CPA, CFP®:

Just last night I heard somebody talking about it. I wanted so bad to jump in and say, hey, I'm not at a social gathering, Let me go into advisor mode and talk to you. It was everything I could do not to talk. So many, so many people just don't get it right. Optimizing social security, as you said, improves your income stability, reduces your need for the stock market. Let's look at what the cash flows look here. At age 82. Instead of taking $100,000 out of the stock market, what are you taking out?

Emma Bean, CFA®:

35. Right, and now the majority is coming from a guaranteed source which we feel really good about.

Christian Cyr, CPA, CFP®:

This is optimizing social security for this fictitious person or couple. Gives them an extra 60, almost $60,000 a year of social security. Get the social security decision right. That is hack number one. Let's talk about hack number two.

Andrea Brannon, CFA®-IF:

Yep, we call it Social Security 2.0. What?

Christian Cyr, CPA, CFP®:

did? We used to call it.

Andrea Brannon, CFA®-IF:

Mailbox money.

Christian Cyr, CPA, CFP®:

We can't anymore because we got-.

Emma Bean, CFA®:

A cease and desist.

Christian Cyr, CPA, CFP®:

Cease and desist. Can't use mailbox money. Somebody trademarked it, but Social Security 2.0 says it better than perhaps the mailbox money. So what, in general, is Social Security 2.0?

Andrea Brannon, CFA®-IF:

It's basically another layer of guaranteed income that we turn on about the same time as the Social Security that we've optimized already. So you can see how that affects your plan. Overall, you get rid of a lot more orange and a lot less reliance on the stock market.

Emma Bean, CFA®:

We also have a playlist on Social Security 2.0.

Christian Cyr, CPA, CFP®:

Go to YouTube, check out the playlist on Social Security 2.0 if you want to learn more about hack number two Social Security 2.0.

Andrea Brannon, CFA®-IF:

But your income stability goes from 60-something percent to 82 percent.

Christian Cyr, CPA, CFP®:

Already we've made major improvements. We have doubled your income stability. We have reduced your stock market risk from what was like 57 percent stock market risk. Now it's down to less than 20% risk, just by those two hacks alone.

Emma Bean, CFA®:

Yeah, but there's one more thing in this picture, which is the orange on the screen after age 75, which is RMDs Hack number three revolves around the retirement planning void.

Christian Cyr, CPA, CFP®:

I just made a video on this. It is about what most people don't realize is that they have a group or a list of professionals in their life and nobody is the quarterback, nobody is the coach, nobody is the general contractor. Cpas are not talking to the advisors. Advisors say I can't give you tax advice. They've never done their own tax return, much less you know customer's tax returns. This is where the retirement planning void gets eliminated when you incorporate the CPAs into the planning, because, yes, they're still orange on the screen. You've done two hacks, but you still have risks. So now let's look at what income at age 82 looks like. We have now incorporated two hacks optimizing social security, and we've added social security 2.0. Now how much are we taking out of the stock market?

Andrea Brannon, CFA®-IF:

Only 4,000, maybe less, depending on your income need.

Christian Cyr, CPA, CFP®:

We went from taking out $100,000 out of the stock market, which we don't know what it's going to do, when it's going to behave and when it's not going to behave. And we basically eliminated the majority of that risk. Yep. Right and you're getting that social security 2.0 guaranteed an extra $30,000 a year. Do you get that $30,000 if the stock market goes down? Yeah, you get it, no matter what it's the surviving spouse still get the $30,000 if spouse one is gone.

Andrea Brannon, CFA®-IF:

Absolutely.

Christian Cyr, CPA, CFP®:

Right, so let's talk about hack number three, shall we? Yep, wow, there's no orange in that picture.

Emma Bean, CFA®:

Yeah, so the thing that we've done here, which for a third time. We have a lot of videos on this if you want to know more details. But this is implementing some advanced tax strategies a Roth conversion in this case, where we're getting all of the RMDs out of the way by converting everything to Roth upfront in the first few. Where we're getting all of the RMDs out of the way by converting everything to Roth upfront in the first few years of retirement. And you can see here, starting at age 70 now, nearly 100% of this prospect's income is now guaranteed from.

Christian Cyr, CPA, CFP®:

Social.

Emma Bean, CFA®:

Security and Social Security 2.0.

Christian Cyr, CPA, CFP®:

All right, We've talked about three hacks to improve and optimize a wise way of spending down your assets in retirement. Uh, Of the three, social security optimization, we have this advanced tech strategy, Roth, or social security 2.0. I'm going to close my ears and, on the count of three, I want you guys to not scream, but say which one of these three do you think is my favorite. And I don't know the answer. Okay ready On the count of three, Chris's favorite hack of the three, Three, two, one go.

Emma Bean, CFA®:

Roth conversion.

Christian Cyr, CPA, CFP®:

Look, I mean, it's the biggest way.

Christian Cyr, CPA, CFP®:

What we didn't show is how much money a Roth conversion adds to your pot at the end of life and most people don't want a bunch of money at the end of their life. But we can talk about investments all day. The stock market is going to go up and it's going to go down right, we can talk about all these things. The biggest strategy here is when you again bring in the CPA not from across the street, not from another town, but bring them into the planning process. Have that person be an integral part of your retirement team. We are talking about six figures of federal tax savings easy in an environment where taxes are going to what?

Andrea Brannon, CFA®-IF:

They're going to go up, only go up.

Christian Cyr, CPA, CFP®:

Okay, so we've done a great job. Let's just review.

Emma Bean, CFA®:

I want to really quick point out a huge question that we get from a lot of prospects, please. So what do you do in this picture from age 63 to age 70? Before all of that guaranteed income starts up, where am I drawing my money from?

Christian Cyr, CPA, CFP®:

Ask Andrea. I'm not answering that question.

Andrea Brannon, CFA®-IF:

They would be taking from if they have a taxable account. It'd be taken from a taxable account and, if needed, from their IRA. And where are my taxes being paid for that huge Roth conversion? Ideally a taxable account. Not everyone has a big taxable account, so then you have to do it with the Roth conversion from the IRA into the Roth. You would be also paying taxes.

Christian Cyr, CPA, CFP®:

Okay, that's a great point. I just want to go back to retirement. Is a 30-year risk window when you tell a person to do a Roth conversion and mailbox money excuse me, social Security 2.0 and optimize their Social Security? Usually it looks like this and people freak out because they're not getting any money. If you look at this, essentially there is a one, two, three, four, five. There's about a seven year period where the only place they are getting money from is their investments.

Andrea Brannon, CFA®-IF:

Right, but we always tell them we can make sure your money is going to last for seven years, 10 years, maybe not 30 years.

Christian Cyr, CPA, CFP®:

Look at this picture Once they turn 71, they're basically never touching their investments ever again. So they do get concerned that for the first five, six, seven years of the retirement they're going to be taking money out of their investments.

Christian Cyr, CPA, CFP®:

And that is a nervous proposition, but you have to have the right mindset. It's always about helping people get the right mindset, which is are you more confident that your retirement savings will last up to 30 years, or are you more confident it can last for seven years? Right, probably 99% of the time people will go oh, so I only have to rely on these investments for seven years. I get it All right. So let's look at the cash flows of this situation, this improved situation, at age 82. How much are we taking out of the stock market at age 82? $9. How much do we care about the stock market at age 82? Don't. How much are we going to need from it? Nothing, maybe like a trip, yep.

Christian Cyr, CPA, CFP®:

Maybe like repair a major house repair, Otherwise you don't even care about the stock.

Emma Bean, CFA®:

Yep and look at that tax bill. I mean that's great, $2,000 in federal taxes.

Christian Cyr, CPA, CFP®:

Eliminated your taxes, virtually eliminated them. So here's the four strategies together. On the left is your baseline. You're taking $100,000 out of the stock market. Your Social Security you made a bad decision on it. You're taking $73,000. More than 50% of what you need is coming from the stock market. Optimize the social security. It improves you, layer in the social security 2.0, and look at that beautiful picture. At the end You've done all three of these things. You've now added the advanced tax strategy, the Roth conversion and everything that goes with it. It's a great picture. Let's just talk about this $100,000 out of the stock market at age 82 or zero, which sounds better.

Emma Bean, CFA®:

Zero Zero.

Christian Cyr, CPA, CFP®:

Getting $74,000 from Social Security or $133,000 from Social Security, which sounds better, yeah $133,000.

Emma Bean, CFA®:

Definitely.

Christian Cyr, CPA, CFP®:

Getting an extra $30,000 of guaranteed money in your bank account every year, or nothing, which sounds better.

Emma Bean, CFA®:

That's a no-brainer.

Christian Cyr, CPA, CFP®:

Paying $12,000 of federal taxes or $3,000 of federal taxes. What sounds better? $3,000. Either way, you are getting $160,000. Any other comments about wisely spending down money in retirement?

Emma Bean, CFA®:

I think we've talked about it briefly, but really all of these things work together in more complex ways than just what meets the eye. So I think it is important to have a full plan, see how all of these different aspects work together and work with somebody that you know has a CPA on staff that can also have some input to the plan.

Christian Cyr, CPA, CFP®:

Don't go to socialsecuritycalculatorcom. Right. Make a social security decision using blinders right.

Andrea Brannon, CFA®-IF:

Yeah.

Christian Cyr, CPA, CFP®:

Don't. How do you know how much social security 2.0 or mailbox money you need? It depends. All of these things work together and when you finally layer in the tax strategy, literally it has about 15 other variables that are impacted. It's a great point. I'm really proud that we did this podcast in less than 20 minutes and since we have an extra 60 seconds, brooke, let's just say what Brooke's favorite number is 42.

Emma Bean, CFA®:

Yep. 42. Next episode.

Christian Cyr, CPA, CFP®:

Next episode is episode 42. So we're going to have to do something, maybe for 42,. We have Brooke on camera.

Andrea Brannon, CFA®-IF:

Yes, That'd be a real gift, huh Brooke, yeah.

Christian Cyr, CPA, CFP®:

Guys, if you want to learn any more about these three hacks, go to our YouTube channel. We have dedicated playlists on all three of these hacks. These are the three things that really help you get the perfect retirement in my mind. Thanks for listening and we'll see you guys on episode 42. Take care.

Outro:

Investment advisory services provided by Sear Financial Inc. Sec-registered investment advisor. All content on this podcast is for information purposes only and should not be considered investment, legal or tax advice. Material presented is believed to be from reliable sources and no representations are made by our firm as to another party's informational accuracy or completeness.

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Christian J. Cyr, CPA, CFP®

Host
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Andrea Brannon

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Emma Bean, CFA

Co-host