Ep # 92: Approaching Your Final Career Year? Get Ready For Retirement With This Checklist.

Benjamin Haas | Feb 8, 2023

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Benjamin Haas 00:02

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts now! Hey, Adam. How are we doing today?

Adam Werner 00:28

Fantastic. How about yourself?

Benjamin Haas 00:30

Doing great. Doing really, really spectacular and couldn't be better. Got lots of sleep last night.

Adam Werner 00:38

All right, I was going to say that sounds like an overcompensation for not being amazing and excellent.

Benjamin Haas 00:44

You got it. But nothing rubs me up, like having a really good conversation that I think if you are in the camp today of being close to retirement or even thinking like you're knocking on the door, this is going to be some really good stuff to think about.

Adam Werner 00:59

So, what's our topic today?

Benjamin Haas 01:03

We're going to talk or maybe we'll put it in like checklist form on things that we certainly would recognize. We've walked a lot of people through the transition from working into retirement. The checklist of things that are really helpful to prepare for and as you and I were kind of preparing for this, it's twofold. This is partially a financial conversation, but what we've come to recognize is that this time of change, fears of getting it wrong, failure, anticipating loneliness, there's a big psychological hurdle to this too. So, if we're going to talk about preparing, it's really to hopefully have those emotions and those fears tampered down a little bit and put people on the right path.

Adam Werner 01:46

Yeah, it's funny, because I'm thinking of just within the last, I'd say week, I've had a couple conversations with people that fall right into this camp that are probably going to retire in the next couple of months or maybe later this year. I think, even when people have a really good feeling that financially, I'm going to be okay in the long run, it's still an incredibly big decision to make. And even, again, a couple of people that I talked to, they're going to be fine but that wasn't enough to just say, alright, this is definitely the date, I'm going to do it then. There are all the other factors that aren't necessarily financial that go into that. So, it is interesting and we've been doing this long enough to help enough people through that transition to kind of know what those pain points are and it's just interesting to kind of see how that evolves.

Benjamin Haas 02:43

Yeah, so then let's maybe put this in two different camps, like 1.) A and 1.) B. 1.) A, I will say, we believe we found a really great resource in the book, "What am I Going to do all Day" by Patrice Jenkins. I would highly encourage it because it really does speak to all the things that we just mentioned on the front end, the psychological, the emotional side. Quick, really simple, easy read but I think really helps people. That being said, 1.) A, 1.) B, let's go through the financial side. There is a checklist here and maybe get into some of those specifics. So maybe start big picture and go down to if you can check these boxes as well.

Adam Werner 03:20

Yeah, I think the first one that maybe give some people anxiety is okay, once I retire and my paycheck stops, now what? Where's that money going to come from? How am I going to make sure that I'm okay? And we're big proponents of if you have enough lead time before you officially kind of make that decision. That's the perfect opportunity to test drive what your retirement expenses may be. And some of that, I mean, you can take that to the extreme where you can build a process, right, the actual logistics of take a certain amount out of your paycheck that goes into an account and that's the account that you spend out of because we know for most people, their retirement income is going to be less than what they were earning. So, it's a good way to kind of test what am I actually spending and make sure that it's going to work.

Benjamin Haas 04:12

Yeah, nobody likes a budget. That's not a fun process. Well, I'm sure there are some that really like it. They're probably accountants but at the same time, there's lots of studies out there that show hey, here, apply it on a percentage basis, here's what people typically spend of their working income. You don't want to rely on these assumptions is our point. When we do long-term planning and we're projecting things out, small tweaks in spending can really change the outlook of that plan and the success of it long-term. So, this is the time right before retirement to not let there be any assumptions. However, you go about it logistically if it is, like you said, let's look at these accounts specifically or let's jot down notes on budgetary items. However, you're going to do it, take that time to test drive it.

Adam Werner 04:57

Yeah, and I think a lot of people, I don't know if this is a misconception or not. But we've definitely talked to enough people that it was kind of a revelation for them. If you're earning a certain dollar amount, I'll throw out a round number $100,000, while you're working, oftentimes the thought is, well, if I can make $100,000 in retirement, I know I'm going to be good. But and that is absolutely the case. But if you're working, you're paying taxes and not only are you paying federal taxes, you're paying state taxes, you're paying local, you're going to have your FICA come out of that if you're saving into a retirement account or you're just saving outside of that, like that all comes out of your pay. It's really that net number, what do you actually kind of net out of all of that, that you actually need to replace? Once you stop working, you're probably not going to be doing the savings. You're certainly not going to have the payroll taxes as part of that. So even just trying to get a better feel for what is that number that I actually need to replace? Then obviously our conversation goes into, let's help kind of give parameters on how is it going to be recreated when somebody retires?

Benjamin Haas 06:05

Yeah, maybe that's the next part of it. If expenses are really important to figure out as you're getting prepared to retire, you're going to have to make some irrevocable decisions. Whether that's potentially a pension that your company provided that. Whether that's social security and when to elect it. We think it's really important to then kind of match up what resources do you have - fixed resources and then your savings with whatever those expenses are so you don't get to the end of your working career and go - well now what with recreating this paycheck. Let's go through a plan and understand what your options are around some of those things that you have to elect because, again, your revocable decisions.

Adam Werner 06:48

That somewhat leads to the next point I think we wanted to make, which is prepare your investments, prepare your savings for withdrawals. Not all situations are created equal. So, we'll give a couple examples. We've seen from the standpoint of the perfect, set it and forget it type mentality, I'm going to invest in this model within my 401k and I'm just going to let it go. History has probably proven that that's an okay thing for growth for accumulation but at a certain point that may not be best suited now moving forward to actually turn that into income.

Benjamin Haas 07:34

Yeah, so getting even more specific. You retired January 1 of last year and your whole 401k was in equities. If you have to start taking withdrawals, you're at the mercy of the fact the markets dropping and you hate to sell as it's dropping or low, not allow it to recover. Getting that portfolio ready to support your withdrawals is a really, really important part of the process we think.

Adam Werner 08:02

And to the other extreme, where maybe someone has more fixed income resources, maybe they have a pension, maybe they have Social Security, maybe they don't have a ton of what we would call like flexible savings, that may be the alternative side of things where you kind of have the fixed resources, that's great. But then what's on the other side of that to combat potential longevity, right, because we were certainly seeing that a lot recently to that it's the fear of running out of money, which I think we all have in some way, shape, or form. Once you stop earning a paycheck, I think that feeling becomes way more visceral. This is the pot of money that I have and this needs to last me. So, you know, having fixed income that you're not going to be able to outlive is great but as we've seen in the last 12 months, inflation can throw us curveballs so that long periods of time, you may need some risk to help counteract that. All of that to kind of say, just have a more balanced approach, in our minds gives flexibility depending how you got to where you are, I'll use the term or the phrase, what got you here isn't necessarily going to be what gets you there the next time. It may require a little bit of advanced thinking and being thoughtful on how to put all these pieces of the puzzle together.

Benjamin Haas 09:33

Yeah, and I think there's probably one more leg to the stool here. If it's figured out your expenses, know what your resources are with your savings and investments, get that in a good spot. The fourth, one of the biggest expenses in retirement, I mean, let's move away from I had this mortgage, my biggest expense now is health care stuff. So maybe this is more age dependent but before you retire, we tell you to have a really good idea of how you're going to cover that and maybe that is Medicare depending on a certain age. Maybe you're retiring at a different time than a spouse. Maybe it's private stuff. But there, we'd ask you to kind of be crystal clear on how you're going to cover it and more importantly, make conservative assumptions on what it's going to cost you.

Adam Werner 10:15

Yeah, so on that note, I feel like we've talked to a bunch of people that the default target of age 65 because then at that point, I know I'm going to be on Medicare. It's just an unknown, you know, health care expense, that I can kind of eliminate if I know I'm going to get to 65, I'm going to be covered by Medicare. There's still the unknown of what care you may actually need but it removes that another potential pain point of oh, now I have to go find other coverage or I'm just going to be changing things. But all of that said, just because that's maybe easier to kind of wrap your mind around. We've also gone through the process with people to show them that, yes, we understand that this is a concern. If you wanted to retire at 62, for example, now you need to cover a couple of years' worth of insurance, that doesn't make it impossible. In viewing the rest of the situation, there very well could be an easy way to mentally bucket funds that can allow that to happen. So, I guess the whole point there is just be thoughtful, go through the exercise of what are my options? What are they going to cost? And how does that actually impact my decision on timing?

Benjamin Haas 11:32

Well said and all of that is in this like, big kind of prep bucket. But there are some granular things that I think we would point you to. Still working gives yourself an opportunity to do certain things, to put certain money away. So maybe we should go through that quick checklist?

Adam Werner 11:52

Yeah, I mean, it all has to do with savings. This is all assumed that there's excess to be saved but to your point, there are some recent provisions as of the Secure Act 2.0 at the end of December 2022. For savers that are over the age of 50, they have these catch-up provisions. They're a little bit higher now than they were previously. So usually that last year of income, there's more opportunity to save either into your employer plan, we would say maybe take a better look at your HSA, a health savings account, while you're still working and earning. What else is there?

Benjamin Haas 12:39

I was going to say the Roth IRA is certainly an opportunity to have money that grows tax deferred for a long period of time or could be a long period of time. So, ignore the phone. One of the rules is you have to have earned income in order to set money aside in that place. I do think it's important, even if you may not have all this excess, recognize that once you get to retirement, you're probably going to start pulling from some of these accounts anyway. There may be is a little cheat that we can do at the end of the well, cheat is maybe the wrong word. There's a little accounting gymnastics we can do to kind of get money set aside as a tax deduction or set money aside into a Roth that can grow and we're just going to pull money from saving somewhere else, all to kind of like joggle the taxes and make sure we can get some money set aside while you still qualify with some earned income.

Adam Werner 13:30

Yeah, so I'll take that one step further that and this is definitely situational, right? All of these little pieces here that we're talking about here. At the end, it really depends on the individual situation. But another opportunity may just be depending where someone's savings are located and I mean that by, is it in a retirement account? Is that pre-tax? Is that after-tax like the Roth? Or maybe it's what do they have in terms of cash, like a cash reserve, actual flexible liquid to them without any sort of restrictions. It may make sense that in that last year, build up that cash bucket to buy ourselves some flexibility in that first year or two of retirement that in a scenario that you laid out, it's January of 2022, the market goes sideways, or I shouldn't say sideways goes down from there. If you had a big enough cash component, you may have avoided that scenario where even if you weren't invested aggressively and all in stocks, you may have had the cash reserve to kind of see you through that and get you to the other side.

Benjamin Haas 14:34

Yeah, it's probably one of our favorite things. When somebody comes with a little bit of like a different timeline on when they think they want to retire. Like I could do it at the beginning of the year. I might just hang on to the middle of the year. That mental accounting of going, oh, this is actually like I can put aside an extra six months of income. It really does add some flexibility. So, I'm glad you brought that one up. I think that's it.

Adam Werner 14:58

Yeah, I think we did it.

Benjamin Haas 15:00

I think we can probably like wrap it up the way that we started. This in itself probably sounds a little bit big and daunting and that's kind of the whole point on why we're here. We've walked many people through this process and if you're not really sure the next steps to take with this checklist, then reach out. Give us a call.

Adam Werner 15:19

Yeah, and everybody's situation is different. So, what's going to apply for one person may not apply to you. So yeah, reach out to us. We'll gladly walk through it. Find out what's going to work best.

Benjamin Haas 15:33

Thanks again for all your wisdom and insight.

Adam Werner 15:36

Likewise.

Benjamin Haas 15:44

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in this show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.

Ep # 92: Approaching Your Final Career Year? Get Ready For Retirement With This Checklist.