Episode #18- 9 Steps to Retire and Stay Comfortably Retired

Wealth Decisions Podcast Transcript for Episode #18- 9 Steps to Retire and Stay Comfortably Retired

Listen to this episode on Apple Podcasts or Spotify

Welcome to The Wealth Decisions Podcast, where each week I take 15 minutes or less to discuss crucial wealth decisions and mindset hacks to help you live a richer life.

I'm your host, Brian Muller, and I've been in the financial services industry for over 25 years, and I'm also a certified life and health coach.

And I have a passion for helping people make better decisions around their money and their life.

So, for the sake of time, let's dive right into it.

To retire and stay comfortably retired requires some crucial decisions.

In today's episode, I'm going to be talking about the nine step retirement decisions plan.

And it's in an order of importance when you are just retired, to ensure that you do all the right things to make sure that your money lasts, long into retirement, and works for all your most important financial goals.

At the end of the episode, I'll give an example of some individuals that are just retired and give you an idea of how this plan, this retirement decisions plan, would play out to help them ensure that they can retire and stay comfortably retired.

So the first step when you're just retired or about to retire within a year is to save at least 12 months of expenses in a money market account.

Determine what you need each month to cover your basic needs and then take that number and multiply it by 12.

Set up a money market account that's outside of your banking or checking or savings account and automatically save a percentage of your income until you have 12 months.

Step two is to get rid of high interest debt.

If you have a credit card with a rate of 25% or higher, you need to get that debt paid off when you retire.

Use that credit card for travel expenses, but only if you can pay that amount off very quickly.

Step three is to determine your true budget for retirement.

You're going to want to factor in your health care costs if you're retiring before the age of Medicare, which is age 65.

You're going to want to factor in your wants and wishes on top of your basic needs, and that would include travel, charitable giving, or helping the kids or grandkids with college.

Figuring out your true budget is going to be essential to make sure that your retirement works, and running all the different types of budgets you could have through a financial plan is going to be essential to make sure that you can kind of understand what your wiggle room is in retirement.

Have a financial advisor run different budget scenarios through a financial plan to show you how well your plan will hold up long term.

Step number four is crucial, and that's determining your asset allocation.

You can't afford to make mistakes when you retire.

You want to have the right mix of investments to create a sustainable income.

You typically can't invest your money the same way you did before retirement.

Investing in retirement is a much different animal.

Because you're needing to take an income from your portfolio, you need to have a balanced approach that has less volatility and less ups and downs to allow you to take an income for retirement from your portfolio.

If you don't need to take money from your portfolio, which is a nice problem to have, maybe you have a really high social security benefit and a really nice pension, then you can invest that portfolio maybe a little different.

Maybe it's more aligned to leave a legacy, so you could invest that money in more growth-oriented investments.

But asset allocation is really, really crucial when you retire.

Having the right mix is super important to make sure that money continues to work long-term and keep up with inflation, but also lower the volatility of your portfolio so that you can take an income.

Step five is to develop your income withdrawal strategy.

I would suggest taking no more than 5% out of your retirement accounts per year and you can set that up as a monthly withdrawal so it feels just like a paycheck.

And you're most likely going to want to take from pre-tax accounts first, taxable accounts second, and Roth IRA accounts third.

But have a financial advisor create a financial plan and run what-if scenarios with different returns and withdrawal rates to ensure your plan works long-term.

If you have a pension or high social security, you're going to want to develop a withdrawal strategy that's maybe a mix of different accounts.

Maybe the majority from a pre-tax, maybe some from a taxable account and some from a Roth IRA, by looking at your tax bracket to make sure that you can continue to stay in that tax bracket and create that tax-efficient income in retirement.

Step six is to look at social security optimization.

You may want to consider postponing your social security to maximize benefits for you and your spouse.

Typically, you want to do this when there's a big difference between your spouse and yourself.

If you have a really high social security benefit and your spouse has a low social security benefit, you may want to postpone your social security so that you can maximize that in case something was to happen to you.

Have a financial advisor run a social security analysis to determine the optimal strategy for you to take to maximize your benefits and to make your plan work better long term.

Step seven is to look at some Roth conversion strategies.

Consider partially converting your IRA to a Roth IRA by looking at how much room is in your tax bracket.

This can be beneficial down the road.

It's tough in retirement to all of a sudden start converting your IRA to a Roth and have that tax bill.

You certainly need to be able to afford to pay the taxes on it now.

And the benefit would be that down the road when you're 78, 80, 82, and those required minimum distributions on an IRA start to be a much higher amount percentage wise, it can bump you up to the next tax bracket.

So starting to think about converting some of those IRAs partially each year over a period of time while staying in the same tax bracket.

So whatever room is in your tax bracket, say there's $20,000 a room in your tax bracket, you could convert maybe $15,000 a year from your IRAs to Roth IRAs over a period of time to try to get more in Roth money to benefit you down the road, especially if you want to leave a legacy.

Because leaving an IRA to your children today, they have to take all that money out within 10 years.

They cannot stretch it over their lifetime.

But with Roth IRAs, you don't have to do that.

There's no required minimum distribution.

So having more in Roth IRA assets can be a great legacy planning tool.

Step 8 is to consider creating a personal pension plan.

You can do that today with low-cost indexed annuities with income riders or fee-based variable annuities with income riders that guarantee an income over your lifetime.

But definitely avoid high-cost variable annuities with expensive M&E expenses and high management costs or really expensive riders.

I have the ability as a fee-based fiduciary advisor to find really low-cost alternatives in the insurance world.

And you can create a personal pension plan just like a pension is.

A pension is an insurance product that gives you a guaranteed income for your life and potentially for the life of your spouse if you choose 100% survivor option.

You have the ability to create your own personal pension as well.

But it all depends on your particular situation.

A lot of times when I meet with people and I look at their income sources and their portfolio, I don't always go and suggest that they buy an annuity.

Annuities are very expensive, especially the annuities that are sold out there in the insurance world.

Annuities can be a great way to create some extra guaranteed income, but just be careful of all the high costs, long surrender schedules, and annuities that are sold by insurance companies with poor ratings.

Step 9 is to pay off your mortgage.

Figure out what you need to pay extra each month to get your mortgage paid off.

Consider refinancing to a 15-year mortgage if feasible.

I know it's not the opportune time to do that right now, but there may be a time where you could refinance at a lower rate or to a 15-year mortgage.

Consider paying bi-monthly if possible to speed up that prepayment.

I don't think it's necessary, like I've said in past episodes, to have your mortgage paid off.

It all depends on your budget and what you need to live comfortably.

There's obviously a huge peace of mind knowing that one of your most important assets is paid off.

So those are what I believe to be the nine most important retirement decisions you need to make to retire and stay comfortably retired.

So let's look at an example of a hypothetical client.

Chris is 64 and Jessica is 62 and they have 2 million in retirement accounts and they have just retired.

They currently have 1.8 million in pre-tax 401Ks, 30,000 in savings, 50,000 in a taxable account, and 200,000 in Roth IRAs.

They also have about 80,000 in health savings accounts.

They currently have a mix of 90% exposure to the stock market and equities and 10% in fixed income.

They think they need about 70,000 per year to live comfortably in retirement and travel and help their grandkids with college.

And of that 70K, 15,000 of that is what they want to use for travel for a period of time, the first 15 years of their retirement.

So they need about 5,000 per month to cover their basic needs.

Chris has a Social Security benefit at full retirement age of 3,400, and Jessica has a Social Security benefit at full retirement age of 1,800.

They have about 12,000 on a credit card at a 25% rate of interest, and they have about 80,000 left on their mortgage.

So the first step with Chris and Jessica is to save $30,000 in a money market fund and move their current savings into the money market to bring their total in money market accounts at $60,000.

The second step would be to pay off the high interest credit card of $12,000.

Step three would be to determine their true budget.

I have a budgeting tool built into my financial planning software that allows clients to add in all their credit cards and bank accounts and it will automatically establish a budget for them and categorize things.

And in this case with Chris and Jessica, they determined that their true budget is closer to $7,000 per month.

Step four is to look at asset allocation.

After Chris and Jessica filled out a risk tolerance questionnaire, we determined that the appropriate mix of their investments now that they're retired and needing an income is different.

They scored 70 on the risk-alized assessment, which is what I use to determine a client's risk tolerance.

And that means that their portfolio mix should be changed to a mix closer to 70% in stocks and 30% in fixed income.

In this case, we ran different asset allocations through the financial plan to determine not just risk tolerance suggestions, but also risk capacity and how that affected their success rate over time.

Step five is to determine the withdrawal strategy.

We first rolled over their 401Ks into IRA accounts, and we set up a monthly withdrawal of 5% from their IRAs.

This gave them about $5,625 after tax, assuming a 25% tax bracket.

And they also could get an additional $1,000 per month from their taxable accounts and Roth IRAs to supplement that income from their IRAs.

And step six was to run Social Security optimization strategies through the financial plan to determine the optimal strategy to use.

And because Chris has a much higher Social Security benefit, it made sense for Chris to postpone his Social Security until age 70, which gave Chris about $4,500 per month.

And if something happened to Chris, Jessica could continue this benefit, which would be more than double her own benefit.

And step seven was to consider a multi-year Roth conversion strategy.

Because the majority of their assets are in pre-tax accounts, this strategy could potentially lower some of their tax liability down the road in their early 80s.

And they currently have about 24,000 of room in their tax brackets, so converting somewhere around 20 to 22,000 per year for nine years would get about 216,000 more in Roth IRAs over the first seven years of their retirement.

And step eight was to consider a personal pension plan.

Neither of them are covered by a pension, but I felt like in this situation they had enough in retirement assets and pretty high Social Security.

So because their income from their portfolio would be enough to fund their lifestyle and their Social Security is high, an annuity just wasn't appropriate or needed unless they scored much lower on their risk tolerance.

If they scored lower on their risk tolerance, I might consider an annuity for part of their portfolio to give more peace of mind and create a guaranteed income.

And step nine was to pay down the mortgage, have a strategy to pay down the mortgage.

They wanted to have the mortgage paid off within five years.

So we developed a strategy to pay an extra $500 per month biweekly to have that mortgage paid off in five years.

So to retire and stay comfortably retired, a lot of crucial retirement decisions need to be made on an ongoing basis.

With Chris and Jessica, we were able to increase their after-tax income, get more money in Roth IRAs, maximize their Social Security benefit and create a solid financial plan that allowed them to leave a legacy, help their grandkids with college and retire with confidence and stay comfortably retired.

But one thing I didn't mention in this retirement decisions plan is unexpected medical expenses.

If there was a tenth step, it would be to evaluate the need for long-term care insurance.

Usually what I do is I stress test a client's financial plan against an unexpected medical expense like long-term care.

And if the plan holds up, if there's that type of need somewhere down the road in retirement, then we don't look at insuring their plan with a long-term care insurance policy.

But if we do that stress test and it definitely impacts their plan, then we'll explore those options.

And if you'd like to download the Nine Step Retirement Decisions Plan that outlines the nine steps needed to retire and stay comfortably retired, you can click the link in the description of this podcast to get your free complimentary copy.

In that guide, I also show the hypothetical client example on how we were able to help them retire with confidence.

You'll also be able to see the hypothetical financial plan for Chris and Jessica, which shows their probability score, their cash flows, their stress tests, and Social Security optimization to see how it looks and what a financial plan entails.

So that's it for today's episode, the nine-step retirement decisions plan to retire and stay comfortably retired.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

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