Retirement Answers

Jacob: 00:02

Change is scary. And what's even scarier about change is whenever you don't have a good plan for it. This is why the last five years of your working career are so important. These are the years that that you have to do all the planning necessary to make retirement less like jumping off of a cliff and way more like jumping off of a curb. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions.

Jacob: 00:26

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, and 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, friends, and welcome back to another episode of Retirement Answers. As always, my name is Jacob Duke.

Jacob: 00:50

I'm really glad that you're here. And if you're a frequent listener, thank you so much for supporting the show. So today I've got an idea that I've kind of had in my mind that I wanted to share with you a little bit, and just kind of flush this out with you. And it's something that I've kind of labeled or called the last five, first five. Now, what is this?

Jacob: 01:07

Well, I think it's the most important years of your retirement planning journey. Now, not to say that the later years of retirement or even before that are important, they absolutely are. But when it comes to actually implementing and developing your plans for retirement, what you're gonna do and how you're gonna execute things, the last five years of your career leading up to retirement and the first five years of your retirement period, those are gonna be the most important years to get right. If we make mistakes during those years, that's gonna be negatively impactful for you long term. So wanted to walk through that today.

Jacob: 01:41

We jump into that idea and some thoughts I have around it, I wanted to share this week's listen review. It comes in from Philly DZ eleven. He gives the show five stars and says that it's packed with helpful info. No other podcast packs as much relevant info as this podcast. It's right to the point.

Jacob: 01:57

Thank you so much for that review, it means a ton and thankful that it's been valuable and helpful for you as you continue on your retirement planning journey. It's because of listeners like this that the show is helpful and can be reached and found by other people. Thank you for that review. If you find the show valuable to you, please do leave a written review like that. That means a ton to me, gives me good feedback, but then also helps other people just like you find the show and benefit from these different planning topics.

Jacob: 02:22

So let's dive into this idea of the last five, first five. Now, why do I think it's important? Well, as you draw closer to retirement, your anxiety is most likely going to rise. If you ask anyone who's retired already, ask them about those last couple of years leading up to retirement, ask them how they felt, tell them remember back and think about, you know, what was that like? Was it super stressful?

Jacob: 02:45

Were you worried? Were you fearful? And most of the time they're gonna say yes, because it's entering this thing of unknown. We've never retired before. We'd never gone into period of, hey, we're gonna live off of everything we've saved and we're not gonna earn an income anymore.

Jacob: 02:58

So it kind of feels really comfortable to stay where you're at in your career and just keep working, even though you might not even want to, because change is scary. And what's even scarier about change is whenever you don't have a good plan for it. This is why the last five years of your working career are so important. These are the years that that you have to do all of the planning necessary to make retirement less like jumping off of a cliff and way more like jumping off of a curb. So there's still a jump that has to take place, we still have to take a little bit of risk and actually go for it.

Jacob: 03:26

But if we can change that from jumping off of a cliff, which is really scary, obviously, or more like to jumping off a curb, it makes it a lot more doable and the anxiety hopefully goes down, our confidence increases. So there's always gonna be some sort of fear around this, around retiring, around actually turning off our income and walking away from a job that we've done our whole life. But the work you do in the last five years will be your launchpad into a successful retirement and it will give you the confidence that you're looking for. So we're not gonna be able to eliminate all the worries, the concerns, everything completely, but we can minimize them to a level that allows you to finally go for it and live out the retirement that you've dreamed of. So let's talk about these last five years and why they're so important.

Jacob: 04:03

Well, the first thing that I think that people need to do in these last five years is number one, we gotta get organized. I talk about this all the time, simplicity is something I'm a huge fan of, but most people by this point in their life have worked either multiple jobs or have multiple different accounts that are open. So got accounts spread out everywhere, different custodians, different account types, we've got, you know, five different IRAs and three different Roth IRAs and two old four zero one ks's. How can we get those consolidated? How can we get those organized in such a way that makes it easier for you to understand your money, right?

Jacob: 04:33

Because most of the time we are stressed or anxious about things that we don't understand. If we can create clarity, that will give us a little bit of confidence as we continue on this path. So at the most basic level, the first thing you can do in these last five years is get organized, really get a good grasp of your money, where it's all at and how much you have. Now, the next thing I have here is that we've got to discover our purpose or maybe we don't have to discover anything, maybe we just have to continue that in retirement. Now, the hardest part here is that most of the time, we've worked a career for any extended period of time, it's almost like that has become a part of us.

Jacob: 05:05

That's part of our identity, it's part of what will be done. Maybe it's taken all of our time where we haven't had the ability to go and find hobbies or spend time with people or do things on travel or trips or whatever that looks like. We haven't had time to go do all those things and discover, I guess what we wanna do in retirement because we're not doing them currently. So in these last five years, you can kind of develop your purpose, develop your why, develop what's important to you, but start building that into your daily life so that you don't work for the next five years and you finally retire, and then all of a sudden you start doing all these activities that you think you will enjoy, but you haven't tried them out yet, or you start doing these different things that you thought would be fun, but they're actually not fun. So use this last five years as a lead up period to figure out what do you actually enjoy?

Jacob: 05:50

Who do you actually enjoy spending time with? Where you like to go? Where would you like to go? What's important to you and how can you start living out your retirement now? One of the biggest regrets that a lot of retirees face is they often wish that they would have started doing the things that they currently do in retirement.

Jacob: 06:05

They wish they would have started them sooner while they were still working. So part of discovering this purpose or this why is starting to do those activities right now while you're still working and ease yourself into them. So it's not again, like jumping off a cliff, but more like jumping off a curb. The next thing that you can be doing in these last five years is to start creating your plan. Now, whenever I say creating your plan, don't think that you have to sit down for ten hours and just hash it all out and put it all on paper at one time.

Jacob: 06:31

It's more or less, you can start doing this slowly and evolve the plan into place. So these are gonna include things like investments, income planning and tax planning. Those are the three biggest ones. Obviously, there's other things that I think should be included in any good plan. But those are the three biggest things that I think we need to focus on here, right?

Jacob: 06:46

So from an investment standpoint, how can we make sure we're optimizing our investments? Do we need to be more conservative or more aggressive or somewhere in between or should we get more diversified? What can we do to improve our current investment situation so that whenever we do get to retirement, it's a lot easier to swallow or stomach some of the risks that we're taking, understanding that we're taking the right types of risk. So most people have concentrated stock positions, maybe they've done a lot of good work in terms of their investment so far, but as we get closer to retirement, our goal is less about growth or maximizing return, way more about preservation moving forward. Now, preservation doesn't mean get really conservative, it just means we need to be thoughtful about how we invest our money.

Jacob: 07:25

The second part of this is we have to understand how much we spend and kind of build that income plan. So this goes back to the three buckets I always talk about. But whenever we're spending money, we've got to figure out how much are we spending every month as we currently live with our current jobs. Now, a lot of people think, hey, I'm only gonna spend 70% of what I'm spending right now. My question back to them is, well, why would you spend less in retirement than you are right now?

Jacob: 07:46

Is it because you will have less income or because you simply are gonna cut back on things that you're spending money on? So we have to do this thing, what I call a spending audit. We've got to figure out how much do we spend on an annualized basis year after year, and you can use this five year period to really get a good gauge of how much you spend every single year. Then once we have that annual amount, we can back into how much we need on a monthly basis and really put together your income plan. So that'll include things like social security and when we're thinking about turning those things on, perhaps we have a pension that will be coming into play at a certain age.

Jacob: 08:17

And then also our portfolio balance, how much are we gonna have to pull from that every single month and really build this total income bucket that we're gonna need every single month, and kind of the different sources that are gonna be there. So the second part of this plan creation is that income planning. And then the third part that I like to focus on here, at least in these five years is going to be tax planning. A lot of people have these large tax deferred account balances, and if nothing's done, most of the time, that's gonna become a big tax issue for you, your spouse or your kids or grandkids in the future. So things come to mind like Roth conversions, building cash, tax diversification and much more whenever I'm thinking about tax planning.

Jacob: 08:53

Now, these last five years, if someone comes to me two days before retirement and says, hey, Jacob, I've got $2,000,000 all tax deferred, I'm trying to do some Roth conversions, what should I do? Well, my first thought is, well, what you should have done is probably start building up cash in the last five years of your working career so that we have cash to pay the taxes with on the conversions, right? So this goes back to why these last five years are really important. If we don't do the proper planning now, for whenever retirement is gonna start in the future, what we're gonna do is we're gonna get to retirement and we're not gonna be able to optimize our savings. We're not gonna be able to optimize what we have, because we didn't take advantage of these five years.

Jacob: 09:30

So building cash is often one of the recommendations I typically have for people in these last five years of work, because number one, you're earning good money most likely, but then also number two, it gives you flexibility in retirement. Now, flexibility might be one of the most important things that I value as a planner in retirement. The reason for this is because whenever we think about, if we have all of our money in a tax deferred account, number one, anytime we take money out, it's gonna be taxed as normal income. Number two, RMDs are going to kick in one day for us and a spouse. So if we have those two things that are going to happen, what can we do before we get to that point to give ourselves more flexibility?

Jacob: 10:07

So if we build after tax dollars in a cash account or a brokerage account, we're giving ourselves diversification from a tax standpoint, just like we want diversification on an investment standpoint, we want that on a tax side as well. And so what we're doing is these last five years can be used in a thoughtful way to help your tax planning and lowering your overall tax bill throughout the rest of your life. And then finally, in all of this, these last five years, what we're really trying to accomplish is, we're trying to answer that question, are you ready? Are you ready financially? Are you ready from an emotional standpoint?

Jacob: 10:39

Are you ready from a purpose standpoint? Are you organized? Do you have a plan for all of these things? And that's really just the question we're trying to answer in all of this. Are you ready?

Jacob: 10:48

And what a lot of people will find, I think whenever they're doing this, is they're gonna find that it's not gonna take them five more years to get ready for retirement. What if in fact, it only took them four or three and they're actually ready to retire sooner? That will be, really rewarding. So what you do in terms of planning and getting organized and figuring things out here in these last five years of your career are gonna be crucial to being able to implement proper strategies in the first five years of your retirement and executing those well. Now here's what you shouldn't do.

Jacob: 11:16

Here's my recommendation. Don't reach out to a planner a month or two before you retire, say, hey, I need help because I'm always gonna say I can probably help you, but probably not as much as I could have is if you'd came to me five years ago. So the amount of progress and the preparation that can be done in these five years, that's gonna give you the confidence to retire and probably show you that you can retire even sooner. Now that's the last five years. Let's talk about the first five years.

Jacob: 11:39

And this is really the time to execute. I often talk about planning, a plan is great, but it's only as good as the execution. Your success in these five years is gonna set the trajectory of your retirement. So if you fail during these five years, your success in retirement could be improbable or could be in jeopardy. Now, here's why I think these first five years are so important.

Jacob: 12:00

There's a few different risks that we've got to take care of. The first one is sequence of return risk. Now this kind of plays into income planning, but also investment planning. We've got to factor in where our money's gonna come from, and we need to allocate our dollars from an investment standpoint appropriately based on that income plan. So if someone comes to me and says, hey, I've got a $100,000, I'm gonna have fixed income between social security, pensions, everything else.

Jacob: 12:25

And they also tell me, hey, I only need a $100,000 to meet my basic needs and have a little fun whenever I want to. Then I'm gonna say, well, your sequence of return risk is gonna be minimal because you're not gonna need any of your money at any particular point. Now the opposite of that is someone who says, I'm gonna have very minimal social security and I'm not gonna have any pension. So all of my retirement income is gonna have to come from my portfolio. The sequence of return risk for that person is gonna be a lot greater because if we have everything invested in a 100% stocks, the stock market goes down 30%.

Jacob: 12:54

Well, means that you're gonna have to sell to create income at a 30% discount. And that's gonna be the problem that you run into long term. You're not gonna have enough money moving forward the rest of your life. So that's where we have to build out and implement an income plan that's actually appropriate for you. Because every person's different, their fixed income's different, how much money they need to spend is different for every person.

Jacob: 13:14

So you need to have a tailored income plan to eliminate this sequence of return risk. Also tied into income planning is gonna be when do we take social security? A few different factors here are gonna be, are you married? Are you single? Is your spouse gonna have a really big benefit?

Jacob: 13:28

Or are they gonna be dependent on perhaps a spousal benefit based on yours? Because if so, when they decide to take their social security is gonna impact their ability to get that full 50% of your PIA. Also here, we've got to think about perhaps survivor benefits one day and saying, hey, if someone passes away first, maybe we wanna make sure that their benefits are maximized. Therefore, the spouse will benefit from a 100% of that whenever that person passed away, leaving them with more fixed income in the future. So social security is a big decision and deciding correctly based on your unique and specific needs is gonna be important as well.

Jacob: 14:04

Next here in these first five years, we've gotta do Roth conversions perhaps. Now maybe Roth conversions aren't right for you, it needs to be assessed in those last five years to say, based on our tax deferred account balances, based on our income projections in retirement, our Roth conversion is gonna be beneficial. And if so, this is when we have to actually execute. So I found that a lot of times the hardest part with Roth conversions actually pressing the button and saying convert. Because if we do a $100,000 conversion, you're gonna pay $25,000 of taxes on that.

Jacob: 14:33

That's a hard pill to swallow for a lot of people. And most of the time we run into this analysis paralysis kind of cycle of, well, I do $101,000 of Roth conversions, it'll benefit me $3 more. It's like, well, okay, we need to have material benefit here. We need to see material benefit in terms of moving the needle for doing this. But the hard part is, is whenever we have too many options or too many ideas, I find that a lot of people end up not doing it, or if they start doing it, they might be doing it incorrectly.

Jacob: 14:59

So Roth conversions, this is whenever we have a plan for it last five years, but the first five years that we're talking about, we've gotta go execute that plan. Now, the hard part with this plan is it's probably gonna be changing every single year, whether it be tax code changes, there's always gonna be something changing. And so we have a plan originally that we're gonna set out to try to accomplish, but that plan is gonna evolve and change over time. But we still have to execute on those conversions if they're beneficial. And one final thought here on these first five years of retirement is what happens if the market drops 40%?

Jacob: 15:30

Then what? What's our plan for it? Like, what are we gonna do? Are we going to panic and maybe sell? Are we going to ride this out?

Jacob: 15:38

Do we have enough runway to ride it out based on our income planning and our buckets that we've built? That's really one of the biggest concerns for a lot of people is what happens if the market goes down immediately in retirement? Well, we've got to have a plan for it because the only guarantee in all of this is that things will not go as we thought they would. That's the only guarantee that I can give you is that life is not gonna happen the the way that we thought it would, whether it be a personal side of your life or it be the financial side of your life, things will not go the way we thought that they would. So in some sense, we have to have a plan for all of the things that we can't plan for.

Jacob: 16:11

That's really what a retirement plan is, is how can we make sure all of the bases are covered based on what we know today, expecting something in the future and realizing that our expectations will be wrong. So having these last five years to plan for your retirement, doing all the hard work, understanding your purpose, creating your plan, what's your investment strategy look like? What's your income plan look like? Are we gonna be optimizing for taxes, simplifying things? Once we get to the first five years, once we actually retire and move into this new stage, we have to go execute the plan.

Jacob: 16:42

We've got to make sure we have plans for the sequence of return risk. When do we take social security? How do we make sure we don't do anything crazy whenever the market is not cooperating? These are the things that we've got to be paying attention to kind of in this ten year period or window of life. And so I just wanted to share that with you today and say, hey, these are some of the thoughts I have on planning, why it's important, why you shouldn't wait to the last minute right before you retire to start building your plan.

Jacob: 17:08

I think you should do this long in advance because your confidence level is gonna be so much higher if you start a lot sooner. You can never start too early. That's my opinion on this. But just wanted to share that with you today. I'd love to hear your feedback and say, hey, Jacob, maybe here's something to add to this, or here's a thought for you.

Jacob: 17:24

But hopefully this helps give you a framework of maybe what you should be looking at, what you should be doing with your time in these last five years of your working career. And then also remember why those first five years of retirement are crucial and making sure you execute the strategies and the plan correctly. So hope it's helpful. I hope you're having a great week. And with that, if you're enjoying the show, please leave a rating and review there on Apple Podcasts.

Jacob: 17:47

I would really appreciate it. Thank you so much, and we will see you next week. 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 jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show.

Jacob: 18:06

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. Look forward to talking with you again next week.