Retirement Answers

Jacob: 00:02

Create a vision. Like, you should have an idea of what you want for your retirement. Think about, hey, what am I retiring to? More than you're thinking about what am I retiring from? And then having that idea and that that perfect ideal retirement in your mind will allow you to allocate your money and your funds towards that so that you are most fulfilled.

Jacob: 00:25

Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey everybody, welcome back to Retirement Answers.

Jacob: 00:50

And this week I've got a fun episode for you because we're gonna be talking about five different things that I think you should be doing as you are five years out from retirement. And the reason that I wanna emphasize this is because so many people come into my office and we have conversations around Jacob, do I have enough money? What am I doing that I need to not be doing? Or what should I be doing that I'm not yet doing? Right?

Jacob: 01:11

And so we have these questions around, am I ready? What can I be doing now to make sure I am ready? And so I wanted to walk through these five different things and they're not in really a particular order of importance. They're just five things that I think people overlook or are not doing before they enter retirement. And they actually pull that plug and say, I'm not going to go back to work tomorrow.

Jacob: 01:30

Therefore, I'm not going be earning an income. So these are things that I think any retiree can benefit from. So we're gonna walk through these things together and I really hope that they're valuable for you. So the first thing that I think you should do as you are within the last five years retirement is evaluate your spending. Remember whenever we get to retirement and we're trying to figure out how much income we're gonna need and where that money is gonna be coming from and when should we take social security and do we have enough to retire?

Jacob: 01:54

All of these things are really dependent on how much we're spending on a monthly basis. And so understanding our spending is something that I think is really hard to do because as we grow in our career, as we earn more money, we really get lax in terms of like a budget. We don't really have a budget. We just say, hey, I'm saving 15% of my income or whatever, 20% of my income and the rest of it I can spend because I know I'm taking care of my retirement savings. And so we don't understand really what we're spending in terms of the amount, but also we don't really see what we're spending it on.

Jacob: 02:20

We just make sure that we have enough leftover at the end of the month to pay all the bills. So dialing this in and really putting your thumb down on what you're spending on a monthly basis, I think is important. And this is a really painful exercise. This is something that no one likes to do. I don't like budgeting.

Jacob: 02:33

I hate looking at it. I hate trying to do it. But as we are in those final five years of retirement, if you can dial in what you're spending and maybe you're spending more than you'd like, obviously, I think we'd all find that we spend more money than we truly think we are. But if you can just figure out where you're spending all of your money each month and how much you're spending, that's gonna be important for you to understand as you get closer to retirement, because you're gonna then figure out, hey, how much money do I need to take from these different accounts, my retirement accounts, and how much cash do I perhaps need on hand? So understanding your spending.

Jacob: 03:03

And with that being said, I wanted to emphasize kind of a different way to think about how much money you might need relative to your spending. So I mentioned this in a previous episode, but it's something I just kinda call the twenty year rule. And this is gonna be a really rough calculation, but it will give you a general ballpark idea of how much money or assets you need to have saved or accumulated before you pull that trigger of saying, I think I can retire successfully. And so the way that I do this really quickly is I say, hey, how much do I spend on a monthly basis? Which means we have to understand what we truly spend.

Jacob: 03:31

And then I multiply that by 12 to get what we spend on an annual basis. And then I multiply that by 20. So that number that you come up with by doing that calculation is what you would need to live on that amount of money for twenty years, in terms of how much you're spending. So that right there does not include inflation. It does not change over time.

Jacob: 03:49

That's saying if all of that money is sitting in cash and you pulled out x amount of dollars every single month to spend on your normal expenses, that amount of money could last you twenty years. Now, obviously you would have that money invested and growing and earning interest and things like that, and having a proper investment allocation. But it gives you an idea of saying if worse came to worse and it was sitting in cash, I can live on twenty years for that amount of money. And then if it's invested correctly, it should last thirty or forty years. So that's just a really quick rough estimation of how much money you perhaps need.

Jacob: 04:18

But once again, this goes back to understanding how much you spend. And so this is one of the things that you should do five years out from retirement is truly dial in your spending and understand where your money is going each month so that you can begin to think about your retirement income plan in the future. The second thing that I really encourage all my retiree clients to do as they enter into this new phase of life is build up cash beforehand. Now, cash is king. That's an old saying, right?

Jacob: 04:42

But I won't necessarily go that far and say that cash is the most important asset you have. But as you get close to retirement, having cash in the bank gives you flexibility that you otherwise would not have. And so I run into this issue with a lot of different planning clients that I work with is they've got $2,000,000 saved in their IRAs and 401ks, but they have only $25,000 in cash. This is an issue. It's not something that can't be overcome, but having 50 to $100,000 or more in cash gives you the flexibility to say, Hey, if I've got this money sitting here, I can take a more aggressive approach on my investment allocation.

Jacob: 05:17

That's one thing that I can do. But also it gives you the opportunity to plan out your taxes a little bit better and really say, Hey, if I wanna pull money from cash and Roth IRAs, and then a little bit from my taxable accounts or a little bit from my tax deferred accounts, I can do that and control my taxes because I'm able to control my income. If you don't have any cash, then you don't have any ability to pull an after tax asset that would be tax free outside of it, unless you have Roth IRAs or those different taxable investment accounts that you perhaps could have a long term capital gain. So building up cash gives you flexibility, and in my opinion, flexibility is something that we should put a premium on as we get closer to those retirement years, because you never wanna be backed into a corner from an income standpoint. You never wanna be backed into a corner in terms of having to do something that you otherwise don't want to do.

Jacob: 06:03

So this is a really important thing for tax planning, controlling your tax rate in retirement is gonna be important as well. And if you have a lot of cash built up, you could do Roth conversions, pay those taxes with the cash. That way you can leave more money invested so that you actually realize the gains or realize the opportunity that the Roth conversions present with that after tax Roth account. So building up cash gives you probably a lot more peace of mind as well in understanding, hey, all my money is not invested in the market and this is something that I can get to quickly if I wanted to. And so the comfort level of cash is one thing.

Jacob: 06:36

It also does not obviously go up or down with the market. This is something that I think is an emotional importance for us as we enter retirement is, hey, I'm not watching my account balances go up and down drastically, right? And so whenever that happens, we get scared or we do things irrationally that we otherwise shouldn't do. So having cash gives you, the cushion or the comfort level that you can say, Hey, I know that my stock portion of my allocation is going up and down, or perhaps we're down 20% this year, but I know that I've got my cash in hand. I've got my cash in the bank that otherwise will be my safety net as I move forward throughout retirement.

Jacob: 07:11

So number two, build cash as you enter into retirement. So that might mean that you might have to pull back on how much you're contributing to your four zero one k's and say, I'm gonna pay the tax now instead of deferring that tax by putting it into the four zero one k. I'm gonna pay that tax now just to put that in the bank account so that I have more flexibility in those first few years of retirement. So number two, build cash. Number three, I really encourage you to pay off debt.

Jacob: 07:37

This is something that, I say this all the time. The number one indicator into someone having a successful retirement is do they have all their debt paid off? Because if you can have all of your debt paid off, you don't have those fixed expenses on a monthly basis. What that does is that allows you the opportunity to take income as and when you want to. You don't have an income need per se outside of your normal living expenses for food, gas, insurances, things like that.

Jacob: 08:00

You don't have any fixed large expenses like a mortgage or a car payment or a HELOC or anything like that that you otherwise should not have on your balance sheet. So paying off your debt before you enter into retirement is something that I value greatly because it's one of the number one things that I see in terms of people being able to retire. If you've got a $500,000 mortgage as you enter retirement that you still have to pay off, well, you've gotta have a lot of money saved up in order to combat that and overcome that because it might not be wise to pay all of that off at one time by pulling it out of an IRA, which would all be taxable. Right? You have to probably pay it unless you have after tax assets like cash, like I mentioned before, or perhaps Roth money or, other taxable investment account money.

Jacob: 08:42

You might not be able to pay that mortgage off very quickly and you might have to pay it over the life of the loan, which obviously you're gonna pay more interest than you otherwise would, and you're gonna have that fixed expense or fixed income need that you have. So I really encourage you to place a high priority on paying off any unneeded debt. If you enter retirement with debt, that's perfectly okay. It really just depends on how much you have saved. If you've got the assets built up that can pay that debt off over time and you're not really worried about it, that's totally fine.

Jacob: 09:09

But for most people who are trying to make things work in terms of getting ready for retirement and do I have enough? Have that debt paid off in terms of especially not having car payments. If you have mortgage with a low interest rate, that's a little bit more doable, but paying off debt before retirement is one of the number one indicators for a successful retirement because it lowers the amount you actually need to pull out of your retirement accounts. Number four, I wanted to encourage you with a non financial point here and it's that I think you should create a vision. Like you should have an idea of what you want for your retirement.

Jacob: 09:41

I think that you should think about, hey, what am I retiring to? More than you're thinking about what am I retiring from? Because if we don't have any hope or ambition or desire to do something new in retirement or have a vision for what we're trying to accomplish or strive for throughout these final years of our life, which could be the greatest years of our life, if we don't have an idea of what we're trying to do or accomplish, I find that most people end up depressed, they spend more money than they otherwise wanted to, and they don't have any purpose whenever they are in retirement. So having this vision of what you're trying to do, write these things down, think about them, you know, take these final years of your career to say, what do I actually wanna do? Do I wanna travel?

Jacob: 10:21

Do I wanna go move closer to family? Do I want to take my grandkids to school every single day? What is the thing that I want to do with my time that otherwise have not had so far? And then having that idea and that perfect ideal retirement in your mind will allow you to allocate your money and your funds towards that so that you are most fulfilled. So whenever we think about money and everything that comes with retirement, all the financial side of things, that's my role as an advisor is to help you get to that point and educate you on, hey, here's how we're gonna be able to do this.

Jacob: 10:52

Here's why we're doing it this way. Part of the work that you've gotta do is create that vision. You know, what are you retiring to? So that's the fourth thing that I wanted to encourage you with today that you should be doing as you get closer to retirement is, is build out your vision and what you're trying to accomplish throughout your retirement. And I think this is one of the perhaps the most important things, because if we have a ton of money, but we don't have a purpose behind it, then there's, then it's not going to work out well for us.

Jacob: 11:16

We're not going to enjoy what we have or what we've saved. We're just going to be miserable and we're not going to have a purpose or passion for anything throughout the rest of our lives. So that's number four, create a vision. Number five, I want you to thoughtfully develop your income plan. Now, what do I mean by this?

Jacob: 11:31

When I say thoughtfully, I want to emphasize that because, most of us, whenever we think of investing, we think of, oh, I'm just gonna have a sixtyforty portfolio or a fiftyfifty portfolio or a 100 to zero portfolio, whatever it might we think of our investments as a percentage of stocks versus bonds or cash. And that's, in my opinion, not as thoughtful as it should be. Whenever I say thoughtfully develop your income plan, that means we have to consider all the factors like social security, maybe have a pension, maybe have other sources of income, rental properties, other things like that. And you also have your investment portfolio or cash in the bank. And so whenever we think about where we're going to be pulling money from, number one, we have to think about which one are we going to be pulling from first, or are we going to be pulling money from all of them at the same time?

Jacob: 12:18

And then we also have to consider taxes. What's the best strategy for taxes whenever we're doing that income plan? Is it better to pull all of our tax deferred money out of our four zero one k's at the beginning of retirement? Or should we delay that until RMD age? Should we do Roth conversions?

Jacob: 12:32

Should we take social security at 62 or should we delay it all the way to 70? What's the best route to go there? All of these different ideas are things that we have to consider and think about as we develop an income plan. And the reason I say thoughtfully develop that income plan is because where we need income from and when we need it, that is the thing that's going to be informing how you should be investing, right? Because if you only need to pull a thousand dollars a month out of your different retirement accounts, but you've got $3,000,000 saved because you have other income sources, rental properties, pensions, social securities, things like that.

Jacob: 13:04

If you have all those different sources of income and they meet most of your monthly needs, well, you have the opportunity because you're pulling a really small portion of your account balances out each month. You have the opportunity to be more aggressive if you'd like to be within your investments. That's an opportunity that a lot of people don't have. A lot of people have to be aggressive to continue to be inflation or some people just want to be conservative because like, hey, I've already won the game. Why do I need to keep putting this money on the line and potentially losing it whenever I can just make three, four or 5% and just, you know, live, enjoy life.

Jacob: 13:33

And so I'm of the belief that as we enter retirement and we're developing an income plan, your income plan and how you think about how much money you need from your accounts each month, that's the thing that should be informing how you invest your accounts. We shouldn't say I wanna just have a sixty forty portfolio and then from that, we're gonna develop an income plan. I think we need to reverse that and say, on how much income I need, that should tell me how I should be investing my money. So these are the five different things that I think that anybody should be doing as you are five years out from retirement. Number one, evaluate your spending, really understand what you're spending your money on just so you can know as you plan for the future, hey, much money am I truly gonna need for retirement based on that amount of spending?

Jacob: 14:13

Is that spending amount gonna be higher or lower as I enter into retirement? Number two, build your cash accounts. That's gonna give you the flexibility that you otherwise need to make different decisions around tax planning. It might give you the ability to delay social security. And so cash and flexibility around that is gonna be one of the most important factors in your success as a retiree.

Jacob: 14:32

Also, three, pay off debt. This is something that I think you should do if you can. It makes your retirement so much smoother, and honestly, it will give you a lot of peace as you go into retirement. Number four, this is a non financial point, but it is that you should create a vision and understand what you're retiring to, not so much what you're retiring from. Having a purpose in retirement is something that I think is one of the more important things in terms of you being fulfilled and enjoying your life.

Jacob: 14:57

And number five, thoughtfully develop your income plan. This is something that will help you inform how your money should be invested as you go throughout the rest of your life. So I hope that these things are helpful as you continue to plan and think about your retirement. Thanks so much for tuning into this week's episode of Retirement Answers. I will talk with you next week.

Jacob: 15:16

Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacob.duke@appliedcapital.com, and I'd love to answer that question for you right here on the show. Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning in to this week's episode of Retirement Answers.

Jacob: 15:41

I look forward to talking with you again next week.