Retirement Answers

Jacob: 00:00

Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host, as always. Before we jump into the show, I wanted to wish you a very Merry Christmas to you and your family and your loved ones. I hope it's a restful period for you, and I wish you many blessings.

Jacob: 00:15

So today, I wanted to share with you eight common mistakes that could ruin your retirement. Now, by the sound of that title, I hope you know that this is not a doom and gloom episode. The idea here is I want to share things with you that I see on a day to day basis, things that could have been done differently before someone got to me as a client that I want to warn you about and tell you, hey, here's some things that you can do to avoid some of the mistakes of people that have gone before you. So this is just a way for me to help help warn you of a few different things that might not be completely visible to you at this point. So let's go ahead and jump into these eight mistakes.

Jacob: 00:48

The first one is is not knowing your true spending number. So maybe you just don't have an idea of how much you spend every month, and as you start planning for retirement, what's gonna happen is you're gonna figure out really quickly that everything hinges on how much you spend. So if you have a mortgage, if you have a car payment, if you have credit card debt, if you have other things that cause you to spend money every month on top of your normal living expense, on top of any discretionary expenses or fun money that you might be spending, all that adds up. And if you don't have a good pulse on how much that truly is, you're never gonna be able to create a proper retirement plan for you specifically. And this is a problem for most people because as life happens and as you maybe get to a point financially where you don't have to like budget, you know, truly, what happens there is you you kind of don't keep track of this.

Jacob: 01:36

You don't really know where your money goes or how much is actually leaving your account every month or where you're spending all of your money. So you kind of lose track, you don't really pay attention to it, but you have enough in your bank account perhaps, or you have enough income coming in to where you don't really feel how much you're spending. So this could be a big mistake. And the reason for this is you only get one shot at retirement. And if you don't know what your true spending number is, or how much you actually spend every single month, how are you going to be able to project forward what you need to be able to retire successfully?

Jacob: 02:04

So if you spend $10,000 a month, but you only think you spend five, well, that's going be a huge problem because $10,000 requires more assets to be able to retire the way that you want to retire. And if you get into retirement and you spend $10,000 a month like you're used to spending, and that's, again, double what you thought you were spending every month, your projections are based on a $5,000 a month spending amount, but you're actually spending 10, you're gonna be in for a rude awakening if that's the case. So you've got to know what your true spending number is. Now, how do you do this? Well, what I typically recommend is look back over the last twelve months, and I want you to add up your total expenses over that twelve month period.

Jacob: 02:40

Now, you might be thinking, Jacob, well, what if I have, you know, these different one offs that might come up or an AC unit needed repair or we had to do something to the car or buy new tires, whatever it might be, that's not like an every year, every month thing. And you might be right, that particular item might not be an every year thing, but there's always something every year. There's always a one off, it's just different every single time. So leave all the one offs in there, leave all the random things that you think aren't normal, leave that in your expense number, and then average that out over the twelve month period to see how much your monthly spending is. That'll give you a pretty accurate number of how much you truly spend.

Jacob: 03:14

And most of the time, to be honest with you, it's going to be higher than you than you thought it was. So don't be caught off guard if that's the case, like probably expected to be higher than you you mentally think it is. So that's the way I'd recommend going about that. Check what your true spending number is. Just audit yourself We're at the end of 2024.

Jacob: 03:29

So look back over your 2024 calendar year, see what your total expenses were, and that'll give you an idea of what 2025 spending might be like. But especially as you get close to retirement, you need to dial this number in so you're not caught off guard whenever you're in retirement. The second mistake that I want to warn you about is assuming that your spending is going to increase over time with inflation. This is a common mistake because when we think about inflation, we think about how much our expenses might be going up over time, whether it be at the grocery store or general products that we buy, everything goes up in cost. And it has over the last five years specifically at a very high rate.

Jacob: 04:04

Now, whether or not that continues in the future, what data shows about retirees is that typically spending doesn't increase on a gradual basis over time. What happens here is if you think about kind of the stages of retirement and actually this phase of life called retirement, you might retire in your sixties, let's say, and this is what we might call your go go years. So the first, I don't know, ten to fifteen years of retirement, that's going to be what we call your go go years. That's whenever you're trying to go and do all the things you've dreamed of when it comes to retirement, whether it be travel across the world or more time with family or or a new hobby you wanted to pick up, whatever it is, that's the time to go do that and explore and actually do this whenever you have the health to do it. And in the middle phase of retirement, what we might call your your slow go years, things are slowing down a little bit.

Jacob: 04:48

Maybe you have some health things that have arisen where it's kind of keeping you from traveling or maybe doing the things physically that you would like to do or that you're used to doing. And then on the back end of life towards the tail end, we're looking at what we call our no go years, whenever life really slows down and things, we're not able to do what we used to do, we're not able to go and spend all the money that we used to go and spend. So this is kind of a progression, a real life progression of what retirement truly looks like. And if you think about it, whenever you're early on in retirement, you have your health and the ability to do all the things you wanna do, you're probably gonna spend more money in that timeframe than you are in the later stages whenever you're at home and not able to get out as much, right? So think about it that way.

Jacob: 05:30

Yes, inflation will likely be going up over time throughout the rest of our lives, But that doesn't necessarily mean that you and retirement are going to spend more in accordance with that inflation number. So this is a common mistake. Most of the time plans are projected out using that inflation adjusted spending amount. And something that you might want to think about as you adapt your plan to your specific situation is something called the retirement spending smile. And this is again, it's the idea of where we typically are going to spend more in the early stages of retirement, less in the middle and perhaps a little bit more on the back end, simply from health care costs or long term care costs that might come up at that stage.

Jacob: 06:07

So what I would encourage you with here is this, whenever you're running your projections and you're looking at what you need to retire, yes, assuming that your spending would increase with inflation over time would probably be the most conservative estimate, but I would say in a more realistic way, front load your spending, spend more in the first ten years of retirement than you will in the back half, and that will look like a more realistic spending cycle for retirees. And what this hopefully will show you is that you've got to go and spend while you have the time and opportunity to go and spend. So projecting forward your expenses over time, maybe do it in more thoughtful manner rather than just doing it based on inflation. The third mistake that most retirees come to me with is they want to be really conservative in retirement. And I get it, right?

Jacob: 06:51

You've saved, you've worked hard, you've done all the things to earn this sum of money and you've done everything right to get to this point to where you've got a million plus dollars or whatever the dollar amount is that you have. It's a lot of money to you, right? Because it's your hard earned money. And so you get there and you're like, oh my goodness, I can't invest this the same way because I might lose it. I might I might risk losing all of it if I invest too aggressively.

Jacob: 07:15

And there there's some truth in that, but there's also kind of a there's kind of a multi step process that would cause you to lose all of your your money. Right? So if you invest in poor investments, or you're trying to pick a singular stock, or you're betting all of your your net worth on one or a couple different things, yes, the risk is great. But even then though, if the account value goes down by 50%, the only way to realize and lock in that 50% decline is to sell. And so there's there's multiple things you have to do and to lose all of your money whenever you're investing.

Jacob: 07:44

But what I think most people get caught up on is the fear of loss. But they don't think about how they're losing money relative to inflation. Going back to number number two, is if we invest too conservatively, let's say hold all cash for whatever reason, and you don't take any portion of your assets and invest them for a long term approach, you could run out of money in the later stages of life because you didn't grow your money fast enough. Inflation is a real thing still, and we have to kind of outpace inflation even with a portion of our portfolio, because who knows how much long term care could cost in the future, or who knows how much healthcare in general could cost in the future. And if we don't plan for retirement in stages, meaning we're trying to fund life right now today in the first few years of retirement, also kind of in that middle stage, but also on the back half, if we don't think about it in stages and invest our money appropriately, we might end up running out sooner than we actually need to.

Jacob: 08:34

We might outlive our money. So investing too conservatively actually presents a risk as well, just like investing too aggressively. Investing too aggressively, you've got sequence of return risk. Well, investing too conservatively, you're not actually growing your money at the rate that you need to to outpace inflation for whatever you might need to spend money on in the future. So you're gonna have to adapt and figure out this kind of middle ground between too aggressive and too conservative.

Jacob: 08:58

And in the way that I like to do that is build out a three bucket plan where I've got a certain amount of money in cash or money markets, and then I have a certain amount of money in fixed income such as, you know, treasuries, bonds, CDs, and then anything else is allowed to be in stocks. And I've got a different episode on that, where I talk about that and explain that in more depth. So I'll link that down in the description below for you to go listen to after this episode. But the idea there is to base all those buckets on your spending. So it goes back to number one, we got to know our true spending number in order to invest our money correctly.

Jacob: 09:31

One point I wanna make here is that, you know, most of the time when it comes to retirement, we have this preconceived notion around how our money should be invested, whether it be 50% stock, 50% bond, or 60% stock, 40% bond. And I don't necessarily like those rules of thumb. I don't like to base your retirement on a rule of thumb such as that, because it's not tailored to you. It's not based on your situation. It's not what you need to do for yourself.

Jacob: 09:55

Yes, those might be good starting places, but we want to adapt it to your situation. For example, if you have all of your income coming in based on a pension and social security, and you don't need any of your portfolio, well, you might not need as much in cash or bonds, because you have the opportunity to actually invest that in a more aggressive way for longer term growth because your immediate income needs are met based on those fixed income sources. Now, the flip side, if you don't have any fixed income sources and perhaps you're delaying social security, you've got to have that bucket number one filled out, you got to have that ready to go. So in the short term, if something happens in the stock market or economically, you don't want all of your eggs in that basket that's going up and down with that market over time. You've got to actually have some cash on the sidelines to weather any storm that might come up in the short term.

Jacob: 10:40

So this is why it's important to go back to number one, you got to know your spending, so you can build out a correct investment allocation for you and your situation. The fourth mistake that I see so often is related to taxes, and it has to do with not having any asset location. Perhaps you've heard me talk about this before on a different episode, but when it comes to asset location, which is different from asset allocation, want to make sure that we are holding the correct investment types in the correct account types. So we've got typically most people have a Roth IRA, traditional IRA or brokerage account or some combination of those three. Those three different account types are taxed differently, right?

Jacob: 11:18

A traditional IRA, you're not taxed on the front end whenever you put the money in and you'll be taxed on the back end whenever you take the money out. And then a Roth IRA is the opposite, you pay tax on the front end to get the money into the account, and then you take it out hopefully tax free in the end once you're retired. And then a brokerage account is different from both of those because you've paid tax on the money that you're going to add to the account, but you're also going to pay tax on any capital gains that you realize along the way or any dividends or interest that you realize along the way. So you don't pay tax on the back end whenever you distribute the money, you're going pay tax annually on any gains or dividends that come into that account type. So when we think about these different accounts from a tax perspective, we want to make sure we align the investments within each account to match the account type based on that tax perspective.

Jacob: 12:00

So we wouldn't wanna hold, you know, in our brokerage account, let's say, we wouldn't wanna hold bonds that create interest or CDs that create interest or money markets if we can avoid it. Now, does that mean can't hold, you know, those different holdings in your investment account? You absolutely can, but if you can avoid it, that's even better because now you're not having to pay tax on that interest every single year. Instead, what you could do is hold stock positions or stock ETFs or mutual funds in that account to where whenever you do receive a dividend from those stock holdings, what you've got then is you're gonna have qualified dividends for the most part, which are taxed at a cheaper tax rate. So you want to align the tax type of the investment with the account type, the same way you wouldn't want to hold fixed income or cash or bonds in your Roth IRA, because the benefit of a Roth is the tax free growth over time and the tax free distributions in the future.

Jacob: 12:52

So if you think about it that way, you don't wanna put things that are not gonna grow in your Roth, you want that account to grow as much as possible for more tax free money in the future, and you might want to hold all of your bonds or fixed income throughout your comprehensive portfolio, you might wanna hold that in your tax deferred IRAs or tax deferred four zero one ks. So asset location is making sure you invest the right investment types in the appropriate account types to maximize or to minimize your taxes every year and maximize your tax benefit. That's number four, as I often see most accounts are invested the same. So if you've got a seventythirty portfolio, it's seventythirty in every single account, as opposed to a higher bond allocation in one and a higher stock allocation in the others. The fifth mistake I often see is taking Social Security too early.

Jacob: 13:39

Now, this is a controversial one, everybody's got an opinion on Social Security, you know, Jacob, is it even going to be around in five years? The trust fund going to run out? Nobody's going to have any benefits? All those questions are there, and so it leads you to maybe believe that, hey, I should just take my benefits while I can to get what I can. Also, might have the thought of, hey, what happens if I pass away tomorrow and I'd never get my benefits that I paid in?

Jacob: 14:01

And these are all things that are really, there are risks there, you can't ignore them. But the way I like to approach social security is I like to keep it in my back pocket until I need it. So think of it this way, you also probably have some, you know, retirement savings, you know, Roth IRAs, brokerage accounts, traditional IRAs, 401ks, you probably got some savings out there that you've accumulated over time. Depending on how much you have, you might want to consider a lot of tax benefits that you could do through Roth conversions. That's a different episode for a different day, but there's some benefit to delaying your Social Security in order to be able to do a Roth conversion.

Jacob: 14:36

So I maybe I can do an episode on that here again soon. But what I often see is that Social Security is isolated in terms of the full plan, like it's not considered with the other strategies that need to happen within someone's retirement plan. And what ends up happening there is someone will take Social Security at 62, but also have $3,000,000 in a tax deferred IRA that something needs to happen there from a tax planning standpoint. But because we took Social Security early, we're limited on how much we can benefit from the tax plan or the Roth conversions. So it has to be considered in the full plan, like when to take Social Security.

Jacob: 15:08

Another factor to consider here too, is every year that you delay social security, your benefits are going up for the rest of your life. They're increasing at a decent rate. So six, seven, 8%, depending on your age, they're going up over time, and that's a good reason to delay is to increase your benefit, because 62 is not your full benefit what you paid in, 67 for most people now is going to be your age in which you can receive your full benefits that you've paid into social security. So you're taking a 20 to 30% discount to take it early, and that might not be the smartest thing to do if you have other strategies that you've got to deploy to help lower your future taxes. So by taking it early, you're going to reduce your benefits and likely create higher taxes for yourself in the future, if a few other things are at play in your situation.

Jacob: 15:52

So I like to think of Social Security as something that's not necessarily my primary driver of retirement income. It's kind of a bonus in my opinion. I know that's not something that, you know, everyone can do and I realize that, But if you can find a way to kind of hold on to that as like a last resort, almost like, hold it in your back pocket to pull out and say, look, I want my Social Security benefits now that the market's down 40%, and I don't want to pull from my portfolio for a couple of years. Let me turn these benefits on. Let me start taking my money, and I cannot touch my portfolio, let that recover, and then, you know, moving forward in the future, I can start taking from that again.

Jacob: 16:25

So when things are good, and your account balances are elevated, and you're making money in your accounts, I would say that, you know, use that money that you've been making, like use those gains and those earnings and spend that and then allow your benefits to continue to increase over time. And if and when markets go down and things aren't looking as good, that's a great time to flip on your benefits and say, hey, my life doesn't have to change at all. I get to keep doing what I'm doing. My income is just coming from a different source. So maybe think about it that way.

Jacob: 16:53

I know it's not a luxury that everyone has, but there's no right decision around social security in my opinion. If we all knew when we would pass away, we would know the right answer, but it's just not what we know. We don't have that crystal ball. So we just have to make the best decisions with the things we know about your situation. And that's a big question for a lot of people.

Jacob: 17:10

I have a way to help kind of navigate that and help, you know, project that forward and see the pros and cons of taking it at different times. So that's the fifth mistake I see taking social security too soon, especially when you otherwise don't need the income. The sixth common mistake that I see is forcing Roth conversions for people, who don't need to do them. And the reason for this is because you hear people like me talking about Roth conversions and all the benefits of them. But the reality is, is they're not for everyone.

Jacob: 17:37

They're not the right thing for everyone because it would actually lead you to pay more tax over your lifetime to do a conversion rather than less, which is the whole point of doing it in the first place. So you've got to have a few things that work in your favor, a few conditions that have to be met in order for Roth conversions to be beneficial. Because if your tax rate is gonna be higher today than it would be in the future, it doesn't make sense to do a Roth conversion. The whole point is to shift income from the future into today at lower rates. And if you don't meet those criteria, then it doesn't make sense.

Jacob: 18:07

So, what ends up happening there is people think Roth conversions are the cool thing to do because everyone's doing them and Jacob talked about them and how beneficial they are, right? But then that leads to paying more taxes than you necessarily need to. And in fact, if you didn't do conversions, you would actually be able to have a lower tax bill throughout the rest of your life, had you not done them. So Roth is great, but it's not everything. And in fact, if you convert everything to Roth before you get to RMDs, you could end up costing yourself some tax free income in the future out of your IRA.

Jacob: 18:38

So analyze your situation thoroughly here. Don't just do Roth conversions because I'm talking about them or someone else is talking about them. Really see if they're right for you because the reality is they're just not right for everyone. A certain type of person, certain type of asset value has to be met in order for these to be truly beneficial for you. The seventh mistake is not having a plan for long term care.

Jacob: 19:00

And you might think, Jacob, I don't want to buy a long term care insurance policy. And I didn't say policy, said a plan for long term care. I didn't say buy a policy, said have a plan for it. And the reason this is a big deal is because no one wants to leave their kids or their family in a tough spot. If something happens to where they don't have, you know, dollars saved and allocated for long term care one day, now someone's got to pick up the bill or someone has to come and take care of you whenever they're busy with their own life.

Jacob: 19:27

And that's typically not a burden that someone wants to place on their kids or their family. Obviously, people have to do what they have to do, and there's sometimes no way around that. But if there is a way to plan for future long term care, it'd be wise to do that. Right? So sometimes that does mean buying a insurance policy such as a long term care policy.

Jacob: 19:45

Sometimes that's not the best solution either. One of the things I like to kind of emphasize around long term care is having a plan for it. And what I mean by that is having some way to to allocate mental dollars towards it. So if you own a home, let's say you own a $300,000 home, and it's completely paid for. Well, if you do have to go to some sort of care facility in the future, guess what?

Jacob: 20:07

You're not going be living in your house. Therefore, you can liquidate your house by selling it. Now you have $300,000 of liquid cash that can now fund your stay or fund your care wherever you might be. And that's an opposition to a long term care insurance policy where you could probably retain your house, but then you have an insurance policy to help pay for your stay. So it depends on what your priorities are, it depends on what you want to maybe, do you want to leave the house to the kids one day to leave it in the family or something like that, maybe a policy is helpful.

Jacob: 20:35

I would just say, you know, think about having a plan for long term care, don't necessarily just go by a policy and consider that your plan. Think about how you would fund it. Way you can write this down and say, hey, kids, hey, family, hey, whoever. Here's kind of my thoughts around this whenever if and when this time comes, I want you to know this. That way you're not in a tight spot because that's not what I want for you.

Jacob: 20:56

I just want you to know that I've been thinking about this and here's how I'm approaching it just so you know. So that's maybe the way I would approach it. But most of the time people kind of ignore this mentally because they don't want to think about these types of things. But it's important to think about and also communicate with your family. And the eighth mistake that I see often is kind of like a tail on that long term care plan, and it's actually not having a state plan for whenever you do pass away.

Jacob: 21:19

So what happens is, is most of the time families receive inheritance or an estate from someone, and they have to pick up the pieces. They have no idea where things are or where their money is or how much they own or or how the assets are titled and all these different things. And then once they figure that all out, you've got to figure out, well, gets what? Right? You know, do they have a will?

Jacob: 21:38

Do they have a trust? Do they have any sort of written documentation on who's supposed to get what? And what you can create there is a lot of tension within a family, you can create a lot of issues because if nothing is explicitly written out and written down in terms of how it's supposed to be distributed and who gets what and how in what percentages, then you're gonna cause a lot of strife perhaps for families, even if they are agreeable families and get along great, right? Because whenever money comes into the picture, people will get weird. Because if you think about it, if someone in your family is is normally, you know, fine and has no issue sharing things, but they're in a tight financial position in the moment of you passing away and this money kind of showing up, they're gonna, you know, naturally want to get more so they can get out of their tight financial position.

Jacob: 22:20

So it's important for you to leave your assets, however much you do or don't have, and whatever types of assets you have, leave them to your kids, your family, whoever in an appropriate manner by creating an estate plan. Now, what is an estate plan actually? Well, it's not just a will. Wills are great, but they're kind of like a catchall. We want them to be the last resort thing that needs to be looked at.

Jacob: 22:43

Instead, we probably want a trust, a revocable trust for most people. We probably want something there that kind of owns the assets, owns our primary home, owns our non retirement assets, and then we want to make sure we have our retirement assets, our IRAs, 401ks, Roth IRAs, make sure we have those titled correctly in the appropriate percentages in terms of who the beneficiaries are, so that whenever time comes, we have all this stuff written down, we have all the documentation to where no one can argue with it. It says what it says, and there's no arguing it. Also too, if we have a trust that's been funded with all the assets that are non retirement, and we also have all of our retirement accounts, you know, with properly named beneficiaries, we can likely avoid what's called probate. And this is a state run distribution of assets whenever they process the estate.

Jacob: 23:29

If we can avoid that, it's going to save your family a lot of time and money and energy to avoid the court process and just the effort it takes to hire an attorney to figure that all out and pick up the pieces then. So if we can get all the planning done on the front end, get all that taken care of and you get to pick how you want things to go. That's a huge benefit, right? Because if you eliminate all the guesswork, all the decisions that could be left with a family, it makes it really easy on them because I feel like nothing is worse than having someone you love pass away and then also having to figure out all their financial stuff immediately and then argue about it for months on end about who gets what and why. It's just not a good way to live and not a good way to maintain continuity within your family.

Jacob: 24:08

So an estate plan is often forgotten in this whole thing, but I would say it's one of the most valuable pieces of your overall financial plan. If you don't have one, I would encourage you to go find someone to help you build that out. Find an attorney you trust there locally, find an attorney you trust to help you walk through this with you. They'll ask all the right questions. Who do you want to receive what?

Jacob: 24:26

How much of each thing do you want them to receive? Are they equal distributions? Is someone going to get more or less than the other people? All those different things. You want to leave money to a charity?

Jacob: 24:34

If so, we should do this, this and this. You know, there's plenty of questions to ask to help you get the right solutions for you. So that's the eighth mistake, not having an estate plan. I encourage you to get one if you don't have one, it'll help you, it'll help your family out a ton in the future. So I hope these eight common mistakes help you create and develop a better retirement plan for you and your family.

Jacob: 24:54

That way you can avoid them. Don't make the same mistakes other people make. And these are things that you want more clarity on or need help with. I've got a link down in the description as well where you can book a free call with me. We can get to know each other a little bit better.

Jacob: 25:05

Happy to have a conversation and see if there's any way that I could help. Alright, I hope you have a Merry Christmas and we will talk to you here again next week.