Help Me Retire Podcast - Episode 2
- Mike Brown
- Jun 11, 2024
- 12 min read
Decisions to make before you retire
Show notes:
This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors...
Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…
Mike and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll be sharing his best ideas with you…
And now… here’s Mike…
Wherever you are in pursuit of True Wealth…
Building wealth…
Seriously considering retirement… planning transition…
No longer working… trying to make money last… and make it matter…
Weekly ideas in our free e-letter: Wealth and Wisdom
Web site: brownfamilywealthadvisors.com or brownfwa.com…
Look under Blog tab for back issues of Wealth and Wisdom…
We record the educational webinars we put on for our clients… you’ll find those recordings there also…
Brown Family Wealth Advisors is also on Facebook and LinkedIn…
We’ve got lots of ways to help you retire…
I believe there are 10 essential questions you need to ask – 10 decisions you need to make – before you seriously consider retiring…
Going to walk you through them today… no particular order…
The first has to do with your vision… exactly what does retirement look like to you?
Not focusing on money here… this is about what kind of life you want to live for the rest of the time you’re here…
Active or passive lifestyle?
What’s your purpose? What’s going to keep getting you out of bed every morning?
Some ideas for you…
One… as Arnold Schwarzenegger puts it… “be useful”… stay engaged…
Two… find a passion… it could be starting a business… volunteering to help the needy… or something as simple as spending time with your grandchildren. It’s your passion… go discover it…
Three… build some structure into your vision… I have an older sister… Type-A personality… almost went stir-crazy when she retired… until she bought a monthly calendar… started filling it up with places to be… things to look forward to…
Fourth way to retire with purpose… find a way to give back… A lot of people helped you get where you are today… look for ways to pay those favors forward…
And five… keep learning new things… keep absorbing knowledge… and keep teaching what you’ve learned to others…
So, if you’re seriously thinking about retiring soon… start working on your vision… and make sure you’re not just retiring from something… but retiring to something…
Next decision has to do with what retirement’s going to cost… How much money do you plan to spend?
That’s largely going to be determined by what your goals are…
Vacation home?
Lot of traveling?
Or do you expect to spend less than you’re spending now…
I think you’ll see that you spend money in different ways once you retire…
Less on transportation than rest of the population…
Less on insurance…
You’ll stop paying payroll taxes once you retire… unless you decide to work part-time…
Retirees in general… tend to spend more of their budgets for housing…
Your healthcare will almost certainly cost you more as well…
I would encourage you to put together a spending plan before you retire… and there are two ways to do that…
Set up a monthly budget… decide what you’ll spend each month… each year in all those different categories…
Shortcut: start with your current take-home pay… and adjust it up or down depending on your needs and lifestyle…
That naturally leads into a third decision you’ll need to make before you retire… a third big question… and that is: Where is this money going to come from?
You’ll more than likely qualify for Social Security at some point…
Did you realize that if you’re married… and depending on which month each of you decide to start drawing benefits… that there may literally be thousands of combinations for taking Social Security?
We spend a lot of time with our clients helping them make this decision… trying to find the optimal strategy…
Maybe you qualify for a pension when you retire… you’ve got to decide at some point whether to take it as a lump sum if that’s an option… or whether to take it in lifetime monthly installments…
And if you take a monthly annuity… you’ll need to decide on whether to include survivor benefits for your spouse… another big decision…
And one last point on income… probably the most important issue… is making sure the income you’re relying on in retirement… increases over time… at least at the rate of inflation…
Social Security is indexed to inflation… most pensions are fixed… and you need to start looking at investments that pay you an income… and give you raises over time…
Look at it this way: Would you take a job for the next 30 years if you knew you would never get a raise?
If your answer is no… if your expenses are going to keep rising once you stop working… shouldn’t your income keep rising as well?
10 key decisions before you retire… and so far we’ve covered the importance of creating a vision of what retirement will look like… deciding how much it’s going to cost… and where that money will come from…
Now let’s look at a huge expense for retirees… and that’s healthcare…
How will you cover the rising cost of staying healthy for as long as possible?
When you reach age 65… you’ll have to make some big decisions regarding Medicare…
It’s a complex program… so the sooner you start learning about it… the better decisions you’re likely to make…
You’ll also need a plan to pay for what Medicare doesn’t… annual deductibles… co-payments… and out-of-pocket expenses…
Will you buy supplemental insurance… a Medigap policy…
Or should you consider an all-in-one policy like Medicare Advantage?
And then there’s the possibility you’ll need long-term care at some point in your life… that’s a huge expense and you’ll need to plan for the possibility that you or your spouse will need long-term care at some point…
The National Association of Insurance Commissioners did a poll asking people if they thought they would need long-term care at some point in their lives… and 8% said yes…
But the truth is… according to the N-A-I-C… the percentage of us reaching age 65 who will need long-term care in some form… isn’t 8-percent… it’s actually more like 70… percent…
Let’s talk about housing for a moment…
Where will you live when you retire… not just now… but in the future?
Will you stay where you are… or will you relocate…
To the beach? The mountains? Someplace closer to the grandkids?
And if you do decide to stay here in town… will it be in the same house?
80-percent of older adults say they want to stay in their own homes for as long as possible…
Yet only one-percent of U-S homes have all five of the basic universal-design criteria recommended for aging in place… things like entries with no thresholds… or levers instead of doorknobs…
We’ve had clients tell us they don’t need that five-bedroom, two-story house anymore… they’re going to downsize to a smaller house… and then either spend or invest the difference…
But what many of them are discovering… is that you might downsize the square footage… but there’s no guarantee you’ll be downsizing the cost…
And finally… although it’s probably decades away… you’ll be smart to at least start educating yourself on senior living options…
Maybe it’s a 55+ community… then sometime down the road, perhaps independent living appeals to you…
Beyond that… there’s assisted living if you need it… then the possibility of skilled nursing… every option gets more expensive…
Again… you don’t need to plan every step of your retirement housing journey before you retire… but at least start educating yourself on your options… before you have to make those decisions down the road…
Next question… do you still owe anybody money? Do you have a mortgage? How about a car payment? Worse yet… are you paying interest on a credit card… because you carry over a balance month to month?
If so… I think you’ve got to make a decision what to do about debt… before you retire…
Once you’ve stopped working… you won’t have that paycheck… you won’t have the same resources to pay off debt…
And the sooner you stop owing people money… the more you’ll have to spend on your vision of retirement…
To me… the credit cards are a no-brainer…
They’re probably charging more interest than any other loan you have… that interest is non-deductible… so if you want your money to compound for you instead of against you…
Rank all of your non-mortgage debts by the rates they charge… and then start working down the list…
Make the minimum payments every month on all of your debts… and then focus hard on the one with the highest interest rate… and pay that one down… get rid of it…
Once you do… take the extra money you were paying on that debt… and apply it to the next one on the list…
Keep doing that until all of your debts are gone… and ideally… you’ll be debt-free by the time you retire…
Now, the mortgage is a different story…
For most of us… the mortgage is the biggest debt we have… and takes the longest to pay off…
We’d like to have it gone by the time we retire… but I don’t think it should be a deal-breaker… more and more people are retiring with a house payment…
If you think you can pay it off without delaying your retirement date… or jeopardizing any of your other important goals… and especially if you have enough in liquid assets to pay off the mortgage… then yes… think about getting rid of it now…
Think of what you can do with that extra money each month once the mortgage… and all of your other debts… are gone…
But if paying off the mortgage is going to blow a big whole in your nest egg… if paying it off is going to trigger a lot of extra taxes… or if you’ve been able to lock in a really low mortgage rate… think twice about paying off that mortgage ahead of schedule…
Speaking of taxes… there’s another set of decisions you need to make before you think seriously about retiring…
Now’s the time to get some professional advice… sit down with your tax advisor and see what tax bracket you’re likely to be in once you retire…
Will it be a lot different than what you’re in right now?
Are there strategies you can employ to take advantage of being in a lower tax bracket in the future?
Good questions for the tax advisor…
Talk with your financial advisor… and ask these questions…
Does it make sense to invest… outside of IRAs… for tax-free income? Or am I better off with taxable investments… even after I pay the taxes?
Ask your advisor what order you should be withdrawing from your investment accounts when the time comes…
Traditional withdrawal order is to take money from your taxable accounts first… then move to tax-deferred accounts like traditional IRAs… and finally… if necessary… to withdraw from tax-free accounts like Roth IRAs…
That’s the traditional approach… your tax advisor might recommend a different withdrawal order based on your situation…
But either way… this is something you need to be thinking about… well before you retire and start pulling money from your savings every month…
Couple of other things to put on your decision list…
Required minimum distributions… or RMDs… money you are required by law to withdraw from your tax-deferred retirement accounts once you reach a certain age…
Chances are it’ll be several years before RMDs kick in… but that doesn’t mean you can put off thinking about it…
We tell clients that the time between when they retire… and the year they have to start RMDs… might represent a golden window of opportunity to convert some of their traditional IRA money… into Roth IRAs…
Roth conversions allow you to reduce the amount of those RMDs in the future… and build up assets in the Roth IRA…
If you follow a few simple rules… you’ll never be required to withdraw funds from your Roth IRA… you won’t pay taxes if you do… and if you decide to pass it along to someone else at the end of your life… they’ll receive it tax-free…
Some nice options, huh? But again… the time to start sketching out these ideas… making these decisions… is before you retire….
Okay… I’ve got three more ideas for you… three more key decisions to make before you retire…
The next one’s my favorite… how will you invest… your life’s savings for retirement?
I’ll tell you one thing you should know… a lot of investment rules change once you retire… some of them get turned upside down…
For example… you’ve probably been saving a fixed percentage of every paycheck… investing that money through your 401-k or a similar retirement plan…
That’s dollar-cost averaging… a time-tested strategy for accumulating wealth…
But did you know that all of the things that dollar-cost averaging does to help you build wealth before you retire… can actually work just as hard against you when it comes to withdrawing money in retirement…
Dollar-cost averaging doesn’t work in reverse… which is why I call it dollar-cost ravaging if you try to follow the same strategy in retirement…
My approach to investing in retirement… is something called “goals-based” investing…
I won’t go into a full explanation today… but it has to do with investing each dollar of your savings based on when you plan to spend that dollar in the future…
For example… if you’ve put away money to buy a condo at the beach later this year… you’re going to invest it much differently from the money you’ve saved for your three-year-old granddaughter’s college education…
Those are two very different time horizons… and you’ll want to use different types of investments for each…
That’s goals-based investing…
When it comes to your overall investment strategy… think back to what I said a few minutes ago…
If you’re heading into a 25- or 30-year retirement… it’s safe to assume that your cost of living is going to increase over time…
Inflation doesn’t stop just because you’ve decided to retire, after all…
Then it only makes sense that your investment portfolio should be designed to create a consistent income… that also increases over time… at least as much as your cost of living…
Otherwise… your money will lose purchasing power… and you’ll spend the rest of your life wondering if your money is going to last as long as you do…
Not the best way to spend what could be the best years of your life…
You know… we’re all different in a lot of ways… but if there’s one thing I hear from my retired clients… is that they want life to be simpler as they get older… less clutter… fewer things to keep track of… easier decisions…
And as technology continues to expand… they worry about keeping their personal information private… and secure…
That’s one reason I recommend you think about getting your life organized before you retire…
Basic record-keeping, for example… what do you need to keep… and for how long… and what can you throw away?
Is it safe to store important information in the cloud… and which information… and which cloud?
There are several approaches to this… from a basic, organized home filing cabinet… to a more sophisticated… internet-based approach to getting your financial life organized… so your information is secure… but accessible to your loved ones on that day… years and years from now… when they’ll need that information…
If getting organized just seems like too big a project… you can even hire someone to help you…
They’re called organizing professionals… and they can help make your life simpler and more productive…
However you approach this decision… realize that the better you have things in order… the less time you’ll have to spend thinking about them… and the more time you’ll have for the things you really want to do after you retire…
So if you do this right… here’s what you’ll have in place before you retire…
A vision for the retirement you want…
You know how much you want to spend…
And where that money will come from…
You have a plan to cover the cost of healthcare…
You understand your housing options… now and in the future…
You’re paying off your debt… if it’s not gone already…
You’ve gotten some good advice on lowering your tax bill in retirement…
You know how you want your investment portfolio put together…
And you’ve found some ways to keep life simple once you retire… so you don’t worry about needless things…
Now… finally… you have the luxury to start thinking about creating your legacy… deciding how you want to be remembered… and who will benefit from all of the success and wealth you’ve been blessed with over your life…
You might think it’s too early to be making decisions about this stuff… but it’s not…
For example… do you plan to leave any money to your loved ones after you’re gone… or to the causes you believe in?
Or do you plan to spend as much of it as you can while you’re still alive?
No judgments here… it’s your money… but you’ll need to decide early on what happens to your nest egg over the rest of your life… conserve it or consume it… because that will help determine how your nest egg gets invested…
You’ll need a set of basic estate planning documents that your attorney can put together for you… to ensure that things are handled the way you want them to be…
And you’ll want to explore strategies for bypassing probate… minimizing taxes… giving money to charities…
We’ve talked about some very big decisions today… but don’t be overwhelmed by them…
Decide which ones are most important to you… and start with those first… then just work your way through… one by one…
You can do this…
That’s going to wrap us up for this episode of Help Me Retire… where our goal is to make the rest of your life… the best of your life…
Remember… we’ve got a lot of resources to help you make these decisions…
Find out about Brown Family Wealth Advisors… at brownfwa.com … and make sure you’re signed up for our free weekly email newsletter… Wealth and Wisdom…
I’m Mike Brown… thank you for spending a little time with me today… I hope it’s been time well spent… and I look forward to talking with you again on our next Help Me Retire podcast…
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
