Obstacles To Your Retirement

Obstacles To Your Retirement

What are the biggest obstacles to retiring when you want to? Whether you are two years from retirement or 20 years, we all face similar obstacles. Today, we discuss the three biggest obstacles to your retirement.

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Obstacle 1: Health Insurance

Many people would like to retire at 62 or younger. But there is a big problem. Health insurance at that age can be very expensive. Depending on where you live, premiums for health insurance can cost between $1,200 and $1,800 per month, per person. That means $2,400 to $3,600 for a couple. You can also expect those premiums to increase a significant amount each year.

The coverage may also not be as good as what you currently have. Many policies have high deductibles and limited options for providers and hospitals. You also may not have prescription coverage.

What can you do to overcome this obstacle?

Delay Retirement

The most obvious answer is to wait until 65 to retire. At that point, you are eligible for Medicare, which is a lot less expensive.

Dedicated Savings

If delaying retirement is not an option, maybe you want to consider saving more. Consider creating a dedicated account designed to cover your health insurance premiums. If you already have a health savings account, that may be a way to help. But you want to be careful using your HSA. You cannot use your HSA to pay for health insurance premiums if you deduct or claim a tax credit for those costs on your return.

Take More Income from Savings

The other thing you can do is to take more income from savings early in retirement. Doing this can add risk to your nest egg. If your investments struggle, a higher withdrawal rate could create problems.

Obstacles to Your Retirement
Obstacles to Your Retirement

Obstacle 2: Mortgage Debt

The second major obstacle is mortgage debt. It tends to be one of the larger items in your budget. According to the Employee Benefit Research Institute, people between the ages of 65 and 75 spend on average $21,000 per year on housing costs. More people are retiring with mortgages than they did 10 years ago. A mortgage can be a significant part of that annual total. How can you overcome this?

Prioritize Paying Off Your Mortgage

If you have a few years until you retire, make paying off your mortgage a higher priority. Saving is important , but eliminating this debt will improve your retirement cash flow.

Many people earn more on their savings than what they pay in interest. But the impact of compounding returns over five or ten years isn’t as significant. Paying off the mortgage can have more long-term value to you when thinking about your retirement.

Refinance Your Loan

You may want to consider refinancing your house, especially right now. Mortgage rates in 2020 are as low as they have ever been. Refinancing can reduce your interest rate and spread the payments over more years. This can reduce your payments. It is not ideal, but it’s better than putting too much strain on your nest egg.

Downsize

Consider downsizing. Sell your house and use the equity to buy something smaller where you may not have the debt. You may not need all that space anyhow. Downsizing could also lower your insurance premiums and property taxes.

Obstacle 3: Inadequate Savings

Most people will struggle to retire on their terms because they did not save enough. How can you overcome this?

Save More

If you have a few years before you want to retire, make saving a higher priority. Re-examine what expenses are critical to enjoying life and cut those that are not.

Pursue Growth

Be more growth oriented. Pursuing higher returns can help you accumulate more. This works better if you have a longer timeframe. Remember, there could be some rough periods where things could be very difficult.

Delay Retirement

The third thing you can do is delay your retirement date. Waiting to retire gives you more time to save. It also reduces the discounts to Social Security or pensions.

Consider Working Part-Time

You can also consider other ways to supplement your income such as part-time lower stress work.

Simplify Your Life

Consider simplifying and minimizing your lifestyle. You may have to scale back on some things and reduce expenses to make retirement work.

Your retirement decision is about balancing risks. Increasing the income from your savings increases the risk of running out of money. But, waiting to retire means you have less time to enjoy your golden years.

There are no one-size-fits-all rules. You need to make the right decision for you and your family. And you need to make the best decision you can with all the information available. If you would like help going through the numbers, talk to a financial planner.

Talk To a Financial Planner

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Offered Early Retirement? Start Here.

Offered Early Retirement? Start Here

A listener was offered early retirement.  There is a lot to consider before making your decision to retire—even if you weren’t offered an incentive.  If you’re thinking about retiring soon, and don’t know where to begin, start here.

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This week we have a question from David. He writes, “I’ll be 62 in the spring. My employer has offered early retirement. How do I know if I can make it work?

This is an excellent question. Let’s cover some of the basics.

Know Your Numbers!

This means your income and your expenses.

Your Savings

How much have you saved? And how much income can your nest egg provide? This is an important thing to determine. The more you withdraw from your nest egg, the greater the risk of running out of money during your lifetime.

You want to get as much as you can without putting too much stress on that account.

Pension

Are you going to get a pension? If so, how much will it be? Should you consider a lump sum payout if it is available? This is an important decision to make. For some people taking the monthly payments makes the most sense. For others, taking a lump sum is a better choice. You will want to work through the numbers and determine what is right for you.

Social Security

You need to make a decision about your Social Security. You are eligible to start your Social Security at 62. But that comes with big discounts. Can you wait to take your Social Security until age 65 or your normal retirement age? Waiting to start your benefits reduces the discount. This can result in thousands of dollars of additional benefits over your lifetime. But it does not always make sense to wait. Sometimes it makes sense to start it at 62 if you need to. Please look at this decision very carefully.

Early Retirement Incentive Payment

If you are getting an incentive to retire, how will that impact your cash flow? Does the payment mean you will not have to take income from your 401k? Does it provide enough income so you can delay your Social Security?

If you can use that money to pay your expenses, you can reduce stress on your savings or improve your Social Security benefits.

Expenses

Knowing your expenses is very important. Look at what you are spending now and how it will change when you retire. Certain things in your budget are going away. You are not going to be driving to work every day. You won’t be buying clothes for work and you may spend less on meals, too.

Some expenses might increase. You may play golf more often. You may have other hobbies that cost money. That means you might be spending more on some things.

If things are tight, is there anything that you can cut from your budget? Are there lower priority expenses that you can drop to help make things work for a few years.

Spending is a major component of your long-term financial success. In fact, overspending can be one of the biggest reasons people run out of money.

Debt

Do you have a lot of debt? Loan payments can be a significant expense, especially car payments and mortgage payments. Can you can use your early incentive payment to eliminate some of those debts? That could have a big impact on your cash flow. You need to work through the numbers to see if this is worth considering.

You may want to consider refinancing your mortgage. This isn’t an ideal strategy. The ideal situation would be to be debt free when you retire. Refinancing your mortgage could lower your monthly payment and help your budget.

Early Retirement Offer Start Here
early retirement offer start here

The Big Issue: Health Insurance

Because you are only 62, one of the biggest things that you will face is buying health insurance. Recently, we have heard quotes for coverage between $2,000 and $3,500 a month. This is a very significant expense. You can expect the premiums to increase each year until you are eligible for Medicare.

Most of those policies are going to have big deductibles, and the coverage may not be ideal. You may also have to change doctors, and you may not be able to go to your preferred hospital.

The health insurance marketplace in our area is very difficult right now. But, if you can figure this out, you have a real chance to make early retirement work.

Your Spouse

Is your spouse going to retire or continue working? If they are going to keep working, how will they adjust to you being home all day when they have to get up and go to work? Maybe they are retiring too, and you both will have to adjust to both of you being home all day.

Practical and Objective Advice

You want to make the right decision for your family.  Consider talking to a fiduciary financial advisor to help you work through the numbers.
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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Can You Still Do Qualified Charitable Distribution in 2020?

Can You Still Do a Qualified Charitable Distribution in 2020?

Can you still do the Qualified Charitable Distribution in 2020? This is a question we received from a listener. We’ll tell you what a QCD is, who qualifies, how you do it, and offer a few tips.

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Today we have a question from Charlie. He asks, “I saw where we don’t have to take our required minimum distributions this year. Can we still do the charitable distribution from our IRA?”

The CARES Act suspended the need for required minimum distributions in 2020. But what Charlie is referring to is the qualified charitable distribution. This allows people who are at least 70½ to send a distribution from their IRA directly to a charity. There is a benefit to this, you don’t have to report it as income.

Tax benefits of a Qualified Charitable Distribution

Today, the standard deduction is much higher. Most people aren’t able to itemize their deductions. This means many people lost the tax benefits from charitable donations.

By not having to report them as income, you do get the tax benefit. And the benefit is even better. You don’t pay federal or state income taxes on the qualified charitable distributions. Itemized deductions don’t help you on your state income taxes.

How do you make a Qualified Charitable Distribution?

Here is what you need to know about Qualified Charitable Distributions:

  1. You have to be at least age 70½.
  2. Because the funds are not going to the account owner, most custodians are going to require a signed form. You’ll need the name and address of the charity.
  3. The custodian will then send the funds directly to the charity.

This distribution is going to show up on your 1099R as a normal distribution. You need to tell your tax preparer that this is a qualified charitable distribution. They will be able to handle it properly for your return.

Something to consider...

Even though you aren’t required to take money from your IRA this year, you can still do the qualified charitable distribution. But, keep something in mind. We are close enough to the end of the year to consider waiting until January to complete this. It will count towards your 2021 required minimum distribution. We’re not trying to discourage you from supporting those organizations now. But, if you wait a couple months, it will give you the biggest bang for your buck.

A tip for 2021 (and beyond)

Let’s say you go to church every week and you put $20 in the collection basket. Use the qualified charitable distribution and send them $1,000 from your IRA, instead. The church gets the same amount and you’ll get the tax benefits you didn’t receive before. If you have questions about how this could help you, talk to a financial advisor.
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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Is Gold a Better Investment than Stocks?

Is Gold A Better Investment Than Stocks?

Is gold a better investment than stocks?  Wendy asks, “I keep hearing ads advising us to sell our stocks and buy gold or silver. For an older investor, is this a valid point?” 

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Gold Better iNvestment than stocks

Is gold a better investment than stocks?  

Gold is one of the ultimate fear assets. When things go haywire in the markets, people tend to turn to gold because it’s a tangible asset, and it has value everywhere.

We’re dealing with the possibility of hyperinflation. If that happens, gold could do very well. Another shutdown could increase the fear level of investors. Gold could also do well in that case. There are periods of time, like early 2020, where gold really shined.

Fact or Myth? Gold is safer than stocks

You have a gold bar locked in the safe. You paid $1,500 dollars for it. Unless you pay attention to gold prices, you know you have a gold bar and it has value. You may not know how much it’s worth, but it’s going to be worth something to somebody.

If you pulled it out earlier this year and thought to yourself, “I wonder how much this is worth?”, you discovered it was worth $2,000. Then, you put it back in the safe until next year. The next time you think about the bar, it could be worth $1,500. It could be worth $1,200.

Gold has extreme fluctuations in value, just like stocks. Let’s look at the last 13 years.

  • 2013 -28%
  • 2014 -2%
  • 2015 -10%
  • 2018 -2%.

Over the same timeframe, stocks were down

  • 2008 -37%
  • 2018 -4%.

Over 13 years, gold lost money four times, and stocks were down twice.

If you look at the last 48 calendar years, gold experienced declines 18 times. Stocks fell 11 times.

Gold is not a “safer asset” than stocks.

Is gold better than stocks?

Here is a link to a good article called, Gold’s Romantic Delusion. There’s a graph in that article which shows $10,000 invested in gold in 1980 versus $10,000 invested in stocks. On July 31 2020, the gold would have been worth about $36,000. Stocks would have been worth $761,000.

Is Gold Better Than Stocks

Source: Gold’s Romantic Delusion by Andrew Hallam.  Click here for the full article

Is it a better asset than stocks for older clients, or any client for that matter? In our opinion, no. The numbers say the opposite. Gold isn’t a bad investment, but I wouldn’t own gold instead of stocks.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Start Social Security at 62?

Should I Start My Social Security At 62?

This question is from Lloyd. He asks, “I’m planning to retire in the spring when I turn 62. Should I start taking my Social Security or should I wait?”

This is a big decision. The only decision we have when we’re looking at social security is when to file for our benefits.

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The impact of retiring early

The year you were born determines your normal retirement age. When you start Social Security before your normal retirement age, your benefits are reduced. If you’re married, the spousal benefit is also discounted. It also means a lower survivor benefit. The dollar amount of your cost of living adjustments will also be smaller. The percentage will be the same, but the dollar amount of the increase will be smaller.

A lot of people still signed up for social security early.

  • 31% of men and 27% of women sign up for their social security benefits at age 62
  • 6% applied at age 63
  • 7% filed at age 64
  • 10% applied for social security at age 65
  • 33% filed for their benefits at normal retirement age
  • 6% waited until age 70 to maximize their benefits

A little more than half of the recipients file for their benefits early.

A look at some numbers

You can do a lot of calculations to help determine when to start your benefits. Delaying your retirement can lead to thousands of dollars of additional benefits over your lifetime. But, you must live long enough to make it work. Generally speaking, you have to live until you are in your early 80s.

Here is how this can impact Lloyd. Let’s say his full retirement benefit is $2,300 per month. If he starts Social Security at 62, his benefit shrinks to $1,640.

At his full retirement age, his wife’s spousal benefit, if he’s married, would be half of the $2,300 or $1,150. At age 62, the spousal benefit will be, at most, $820. The combined benefits are nearly $1,000 less each month.

If Lloyd waits to start his Social Security, his discount isn’t as big.

  • By waiting a full year to apply for benefits, his amount grows by 7%
  • If he waits two full years, his benefit grows by over 14%
  • Should he wait until age 65, three years later, his benefit grows by 24%

A big decision

Should Lloyd take his Social Security benefits at 62?

It depends. Is he healthy? Is he married? Can he afford to retire without taking his benefits and not to put too much stress on his savings? There are a lot of factors, and it’s hard to say yes or no.

Here is what we typically see. People start their social security when they retire—regardless of their age. Most of the time, it’s because they need the money. The ones who retire and delay their Social Security have been good savers and have low expenses.

You need to consider your entire situation. You can’t make the decision about Social Security in a vacuum. There are many other factors involved in this process.

If you are unsure what to do, talk to a financial advisor before you make a costly mistake.

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Use My Savings To Pay Off my Mortgage?

Should I Use My Savings To Pay Off My Mortgage?

This question is from Karen. She asks, “With interest rates so low, we aren’t earning anything on our savings. I’m also worried about another significant drop in the stock market. Should I take money from my savings to pay off my mortgage?”

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There are two parts to this. One is eliminating debt. The other is what is the better use of your money?

Paying off debt is never a bad thing, especially as you get closer to retirement. According to the Employee Benefits Research Institute, the largest annual expenditure for people 50 and older is housing. If you can pay off your mortgage before you retire, it can help you have a more successful retirement.

There is also a huge psychological boost to being debt-free. What happens if the economy shuts down again and you get laid off? Not having a mortgage payment can reduce your stress. It’s less stressful knowing you don’t have to come up with $1,000 each month when you’re not working. We cannot underestimate the value of being debt-free.

What is the best way to do this? Here are some factors to consider. These apply whether you’re using a lump sum or paying extra on your principal. 

Compare interest rates

The first thing is to compare your current interest rate to what you earn on your savings and investments. If your mortgage interest rate is high, 4% or more, and you’re earning 0.75% (or less) on your savings, this decision is easy. The difference in the cost of your money compared to what you’re earning is significant. Using your savings to pay down or pay off your mortgage makes a lot of sense. If your interest rate is closer to 3%, and you’re invested in something that has a potential to earn 8%, the math changes.

Your age

The second factor is your age. For someone under 40, the value of compounded returns from investing can be better for your future. If you are closer to retirement, the benefit to paying off that mortgage is more valuable.

use savings pay off mortgage
use savings pay off mortgage

How long will you live there?

Are you planning to stay in your house for a long period of time? If you’re planning to remain there for several years, paying off the mortgage makes more sense. If you’re planning to sell your home in the next 36 months, I’m not sure the answer is as clear. You may not want to pay off your mortgage if you plan to sell it in the very near future.

Tax costs

What are the potential tax costs to raise the funds to pay off your mortgage? Does that come from an IRA or a 401k? If it does, then the entire distribution can be taxable.

Here is an example. If you need $100,000 to pay off your mortgage, you may need to withdraw $133,000 from an IRA. The extra amount will cover the taxes. That is a very expensive way to pay off your mortgage.

Selling stock to pay off your mortgage can also result in a significant tax cost. Your sales proceeds are $100,000. You paid $50,000 for those shares. You will incur $7,500 in capital gains taxes and some additional state income tax. That is also an expensive way to pay off your mortgage.

If the money is in a savings account, there is no tax cost to use it for your mortgage.

Paying off debt is rarely a bad choice, but you need to look at it from all angles and make an intelligent choice.

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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How Do I Use My Savings To Create Income?

How Do I Use My Savings To Create Income?

Tim asks,”How do I use my savings to create income in retirement?”

In this episode, we’ll talk about:

  • Immediate Annuities
  • Bonds
  • Dividend Paying Stocks
  • Systematic Withdrawals

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Do you want to hear the full show?

The full episode is over 25 minutes long.  And we’ve found that not everyone wants to spend that much time listening to things.  But if you want to listen to the entire episode, it is below.

We answer:

Transcript: How Do I Use My Savings To Create Income?

1. Immediate Annuity

This is an insurance contract that creates an income stream for the rest of your life. You can add survivor benefits to this so it will be the rest of you and your spouse’s life. It’s guaranteed by the insurance company and their ability to pay.

Advantages

Eliminates market value risk

This eliminates any market value risk. There are no worries about the stock market going up or down.

Better payouts

You usually will get a higher payout than using the 4% rule. Immediate annuities typically pay out a greater percentage.

Income you can’t outlive

It will pay as long as you or you and your spouse are alive.

Disadvantages

Lose control of your principal

You lose all control of your principal. So if you need more income or a lump sum in the future, you likely won’t have access to the principal for those needs.

Fixed Income

The payout is typically a fixed amount. There are a few contracts out there that will provide some inflation adjustments. But those contracts will reduce the initial income benefit to account for the annual increase.

No Legacy

When you and your spouse have passed, there is no money to leave to your heirs. If you buy the contract, and two months later something tragic happens, that money is gone. There are a few policies that have refund provisions. But, that provision could reduce your monthly income.

Low Interest Rates

Low interest rates mean smaller payments. When interest rates increase, this will be a more attractive option.

This may be a reasonable choice for part of your savings. I wouldn’t recommend anyone put all their savings in one of these contracts.

What we often find is most people don’t like giving up control of their principal. And we believe there are better ways.

2. Income Producing Investments

You can also use income-producing investments. This means bonds and dividend paying stocks.

Bonds

Bonds pay an interest payment. Unfortunately, bonds are not a great choice right now. You might be able to find good interest payments on some bonds, but you have to pay a high premium for them. This means when the bond matures, you’ll get less than what you paid to buy the bond. Newer bonds won’t have good interest rate payments. This limits your income stream. Bonds also offer little or no appreciation potential.

Dividend Paying Stocks

Dividend paying stocks make sense. Over time, dividends tend to increase. There is also potential to see your principal grow

Constructing a portfolio that can generate a 3% yield or higher can be a challenge. You want to buy good dividend payers. This means companies that reliably pay their dividend and increase their dividends.

You can do it, but you introduce other variables. There’s risk for concentrating too much in a particular stock. Dividend cuts can create problems. This isn’t a risk-free strategy.

The last thing to consider is most people don’t want to be 100% invested in stocks. So that can limit your income as well.

Systematic Withdrawals

The third way is to use systematic withdrawals. This is one of the better inventions by the mutual fund industry. Over time, you sell shares of your investments to create income. It’s a very simple process.

You don’t have to use mutual funds to do this either. It can be done with exchange traded funds or individual stocks. You sell shares to produce your income.

You can combine this with a dividend strategy too. If you own a company that doesn’t pay a dividend, you could sell shares to supplement the dividends you get.

Here is something to remember when you’re looking at producing income. Snow or rain, it’s all water. If the “snow” represents dividends and the rain is “capital appreciation”, it all benefits you. It doesn’t matter if your income is from dividends or from selling shares.

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3. Managing Taxes

You also want to think about your taxes. If you have many sources of retirement funds, you have that ability. Distributions from Roth IRAs, for example, are tax free. Income from a personal or joint account may be more tax friendly. Distributions from IRAs and pre tax 401k plans are taxed as ordinary income. Most of the time, 100% of those distributions are going to be taxable. When you have separate sources of savings, you can manage your tax liability to some degree.

Unfortunately, for many people, their only asset for retirement income is their 401k. This limits your ability to manage your tax bill.

It can help to talk to an advisor about your situation. They can help you with a strategy that makes sense for you.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Do You Need $8 Million to Retire?

Do You Need $8 Million To Retire?

Do you really need $8 million to retire? This is one of those articles that makes you scratch your head and say, “Where is this coming from?”

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Transcript: Do You Need $8 Million to Retire?

The article appeared last week on marketwatch.com. It was titled,  The New Savings Target for a Modest Retirement: $8 million? The article is based on a blog post written by someone who calls himself the Financial Samurai. The Samurai believes that the 4% Rule is dead. The actual safe withdrawal rate is 0.5%. Let’s dig into this.

Using the 4% Rule

The 4% Rule is something that a lot of financial advisors use. It starts the conversation about how much income you can generate from your retirement savings. You can use the rule to set a savings goal, or you can use it to determine how much income your savings will provide.

If you’re trying to set a savings goal, determine how much income you’ll need from your savings. If you need $40,000 from your nest egg, multiply $40,000 by 25. Your target is $1,000,000. (4% of $1,000,000 is $40,000 a year.)

Do You Need $8 Million to Retire?

Perhaps you’re getting close to retirement. You’re wondering how much income you can expect to get from your 401k. You’ve saved $500,000 in your 401k. Multiply that by 4% and you get $20,000 for the first year.

$8 million to retire

If you use 0.5% to compute your savings goal, it changes the math significantly. Instead of needing a million dollars to create $40,000 of income, you’ll need $8,000,000!

More on the 4% Rule

This video and blog post goes into greater detail about the 4% rule. 

Is This Realistic?

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Your $500,000 401k with a 0.5% withdrawal rate creates $2,500 of annual income. That’s a little over $200 per month.

Do You Need $8 Million to retire?

Is This Realistic?

Is this half percent safe withdrawal rate, the “new normal”? We disagree. We believe the 4% Rule is a valid tool to use to start the income conversation.

Academic minds developed the 4% Rule by studying past return data for stocks and bonds. The researchers were looking for a withdrawal rate with a very high level of success. We define success as not running out of money during your lifetime.

They tested it through all types of extreme market events. This includes bear markets like the “dot com” bust, the Great Recession, and the early 1970s. The 4% Rule held up in all those circumstances. It doesn’t mean it will hold up going forward. It’s not guaranteed.

Higher Withdrawal Rates Increase Risk

We know this. As you increase your withdrawal rate, you increase the chances of running out of money. You increase the odds of significant spending cuts because of adverse market conditions. The 4% Rule is not a silver bullet. We don’t know what future returns will be. But the 4% Rule remains a good starting point. The pandemic, an over-valued stock market, or low bond yields don’t change our opinion.

You don’t need $8 million to enjoy a modest retirement. People can retire and live a happy life on far less. They figure out ways to make it work.

The 4% Rule is a baseline. We work from there based on each individual’s circumstances to create a plan.

Do You Need $8 Million To Retire?
Do you Need $8 Million to Retire
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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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10 Years From Retirement: What Should I Be Doing?

10 Years Away From Retirement: What Should We Be Doing?

Heidi asks: “We’re 10 years away from retirement.  What should we be doing to prepare? Should we pay off our mortgage before we retire?”

Please note:  This is a highlight from our July Ask a CFP Pro show.

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10 years from retirement
10 years from retirement

Transcript: 10 years from retirement: What should we be doing?

We want to retire in about 10 years. What’s the best way to prepare for that? And is it best pay off our house before retiring?

Still in growth mode

If you’re 10 years away from retirement, you still should be in growth mode. This means you’re more heavily invested in stocks. You’re looking to pursue higher returns.

Over the next decade, bonds aren’t going to help you a whole lot. You’re looking at 1% to 2% returns going forward based on current yields.

If there is a major downturn in the stock market, you have some time to recover from that. Even though we’re not out of this bear market yet, there could be another one in the future. You’re still going to be able to recover. If we do have that downturn again, it becomes a great buying opportunity. You may never find prices that low again.

Volatility shouldn’t be a significant concern at this point. As you get closer, when you’re five years away, that story may change. But, right now, you still have the ability to enjoy those compounded returns. If you can save and invest for higher returns, it should pay off for you in the long term.

I wouldn’t have any problems being 100% invested in stocks for the next four or five years, if I were you. I think the benefits will outweigh the long term risk. It could be tough to do. When you have those volatile times, nobody likes to see their balances go down. But again, I think the growth will be significant for you.

Eliminate debt

Should you pay off your house before you retire? If you can do so in a reasonable fashion, absolutely—yes! In fact, you should try to have all your debts paid off by the time you retire. That means car payments, your mortgage, and credit card debts. The fewer expenses you have, the better your retirement is going to be.

Retirement is all about cash flow. In our experience, the biggest reason people run out of money is because they spend too much. And debt payments are a form of spending. So the more you spend to pay debts, the less you have to do other things. Or it could mean you have to take more money from your nest egg than you should.

Eliminating debt can be a huge boost to your retirement plans as a whole.

Here are some other things that you want to do

Know your Social Security numbers…

Get your Social Security earnings record and benefit estimates. This is going to be a key component in helping you plan for retirement. It will help you make good decisions about when to start your Social Security benefits. And for most of us, it’s still a key part of our income.

Get organized

Get things organized. Understand where all your accounts are and how they’re invested. This allows you to create a better plan.

What does retirement look like?

It’s too soon to do detailed budgeting. But at the same time, you can start thinking about what your retirement is going to look like. You can think about what you want to do in retirement. Then you can see how much it will cost.

Health insurance

Have a good idea of what your health insurance is going to be if you’re going to retire before age 65. This is huge. If you have to go out and buy your own health insurance, that’s a big expense that you’re going to incur. You want to know what that’s going to be because it will have an impact on the numbers.

Work on your current cash flow

The last thing I would suggest is get your current cash flow situation in order. Know where your money’s going. Know how you’re spending it. If you can rearrange things to focus more on saving and eliminating debt, you’ll be glad you did. You have to make those things a priority. When you do that, you’ll have some flexibility and freedom in your retirement.

10 years retirement
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10 Years From Retirement

 

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Maintaining Spending Levels in Retirement

Maintaining Spending Levels in Retirement

Maintaining spending levels in retirement can be a challenge.  A recent study showed that nearly half of retirees were forced to reduce their spending because they didn’t have adequate resources. What are some of the characteristics of those who were forced to cut their spending?  We’ll explore that so you can make better decisions about your retirement.

Watch Now: Maintaining Spending Levels in Retirement

maintaining spending levels in retirement

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Maintaining Spending Levels Retirement

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maintaining spending levels in retirement

Show Outline

  • Intro
  • Consumer Financial Protection Bureau Study
    • Looked at the ability of retirees to maintain their spending level 5 years into retirement.
    • Most retirees see their spending decrease naturally.
      • Spend less on things like transportation and clothing
      • Do fewer things as you get older
      • On average, spending in retirement decreases by 19%
  • The Data
  • What can you do?
  • Outro

Spending in Retirement Decreases...

In general, people tend to spend less in retirement.  Many people find they spend less on transportation, clothing, and entertainment.  Those who had adequate savings saw their spending level decrease by 19%.  But, those who couldn’t maintain their spending level saw their spending drop by 28%.

The Factors in Maintaining Your Spending Level

Marital Status

Married couples are better able to maintain their spending level.  Receiving two Social Security payments is a significant factor.

Age

Older retirees had more success than the younger generations.  More older retirees received company pension benefits than Baby Boomers. 

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Social Security

Starting Social Security at younger ages means you receive a smaller benefit.  Delaying your retirement improves your benefit, spousal benefits, and survivor benefits.  This means you rely less on your savings.

Home Ownership

Home ownership factored into retirees ability to maintain their spending level.  Renters struggled compared to those who own their homes. 

Mortgage debt also played a role.  Those without a mortgage had more success maintaining their spending level in retirement.

Debt

Non-mortgage debt includes things like credit cards, car loans and leases, or other types of loans.

Those who carried debt into retirement struggled more than those who were debt free.

What Can You Do to Plan for A Better Retirement?

1. Consider delaying your retirement

Delaying your retirement can improve your Social Security benefits.  It can give you an opportunity to save more and benefit from compounded returns.  And it can help you eliminate debt.

2. Create a plan to be debt free

The data shows people who have debt struggle more.  Many times, loan payments are your larger expenses.  Eliminating those before you retire can reduce the stress on your retirement budget.

3. Save more aggressively

This doesn’t mean use more aggressive investments (though that can help).  It means make saving a higher priority, and try to save more.  

maintaining spending levels in retirement
maintaining spending levels in retirement
maintaining spending levels in retirement

 

Don’t Miss An Episode

Get every episode of Monday Morning Money in your inbox.  Join our mailing list.

Subscribe Where You Find Your Podcasts

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts