When Planning for Retirement, Where Do You Start?

When preparing for retirement, where do you start?  That is a question submitted by Tony.  Today, on Monday Morning Money we’ll answer it.

Video: Answering A Reader Question, Where Do You Start?

Each Episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490 AM and 101.3 FM).  You can hear it at 11:07 every Monday. 

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In addition, you can also hear this episode on our YouTube Channel.  Please take a moment to subscribe, as it helps our analytics and improves our reach.  This also appears on Facebook and LinkedIn.  

Audio Only Version: Click Here

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

The Question:

“I’m 60 years old and want to retire in a few years. My wife and I have been saving in our 401k’s, but the thought of retiring seems overwhelming. I need to figure this out, where do I start?”

-Tony

The Answer: Where Do You Start?

This is a great question and one we hear quite often. 

Navigating retirement is about managing cash flow. And we need to follow one of the key rules for real-life financial success: spend less than what you earn.

In retirement, our income changes. We go from earning a paycheck to receiving Social Security or a state pension plan. It also means we need to use what we have saved to produce income. For most of us, there is a limit to how much income those resources provide.

So where do you start? Begin with understanding how you spend your money.

Many People Don't Create A Budget

Unfortunately, most Americans don’t know what they are spending.  They are happy if they have money in their bank account when the next paycheck arrives.

According to a survey conducted by the Certified Financial Planner Board of Standards, almost 60% of Americans don’t track their spending. So, unless you are part of the 40% who do, this should be your first task.

Getting Started

Get out those bank statements and credit card bills. It’s time to see where it all goes. It also helps to categorize those expenditures into 3 major categories. Fixed expenses, essential expenses, and discretionary expenses.

Fixed expenses include things which are difficult to change. This is going to include car payments, mortgage, rent, insurance premiums, prescription costs, and taxes.

Essential expenses are necessary items to living, but you do have some control. This will be groceries, your electric bill, cable bill, and other utilities.

Then the discretionary expenses include everything else. Hobbies, eating out, recreational expenses, vacations, entertainment. These are things you could eliminate.

Download Our Free Cash Flow Worksheet

To help you with the budgeting process, we created a free worksheet. You can download it by clicking on the picture to the right. It will help guide you through each of the categories mentioned above.

Where Do You Start

Why Should You Do This?

Why is understanding your spending so important? In our experience, overspending is the biggest threat to your retirement savings. When you can control your spending you improve your chances of longer-term success.

After you go through this exercise you can begin to work on the income part of your retirement puzzle. But that’s a topic for a different episode.

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Monday Morning Money is a podcast talking about current events which  impact your bottom line.  

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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People are Living Longer

People are living longer. This creates bigger challenges for your nest egg.  

Video: People are Living Longer

Each Episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490 AM and 101.3 FM).  You can hear it at 11:07 every Monday. 

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In addition, you can also hear this episode on our YouTube Channel.  Please take a moment to subscribe, as it helps our analytics and improves our reach.  This also appears on Facebook and LinkedIn.  

Audio Only Version:  Click Here

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Longer Life Expectancies

There is an old joke in the life insurance industry. What is the difference between an actuary and a mob boss? The actuary can approximate when you will die. The mob boss can tell you the date and time.

people are living longer
women live longer

According to the Social Security Administration, a 65-year-old man has a life expectancy of 84 years. Women live longer than men. A 65-year-old female should expect to reach age 87. Keep in mind these are median ages. This means half of the people will live to be even older.

Are you married? The “how long” question becomes more complicated. 

couples live longer
living longer

There is a 51% chance at least one spouse reaches age 90. And there is about a 9% chance both will live that long.

What does this mean to you as you think about your retirement? It means—at a bare minimum— you should plan to live at least 20 years in retirement. But that may not be enough. The Social Security Administration estimates one in four of today’s 65-year-olds will reach age 90. They project 1 in 10 will reach age 95. It is very possible your retirement savings might need to last up to 30 years.

Living Longer Creates Challenges

A couple of weeks ago we shared a statistic with you. Almost half of Americans say running out of money in retirement is their primary concern. The idea you may live 30 years in retirement adds to the stress.

Here is the challenge we all face. Your retirement savings has to:

  • Generate enough income for today.
  • GROW over time to produce MORE income in the future
  • And not go to zero before your pulse does.

And you have to deal with a lot of external forces such as

  • A historically low interest rate environment which shows little sign of improving.
  • A volatile investment world. Which despite current events has always been, and will always be like this.
  • And the ever-present rising costs of the things we buy.

Living Longer Means We Have To Plan Better

This is not an easy puzzle to put together. But it helps if you look at the big picture. Many of the choices you make impact your retirement savings. Here is a quick example of what we mean.

Let’s compare your decision to retire at age 62 vs age 65.

People are Living Longer

Starting your Social Security early results in a permanent reduction of benefits for both you and your spouse. It can result in a larger out of pocket expense for health insurance.

This can place more stress on your savings in two ways. Your savings has to last three years longer, and it may have to generate more income.

But if you wait until age 65, those early Social Security discounts shrink. You are eligible for Medicare.  This can reduce the stress on your savings.

And this is just one example. We face a lot of choices which can impact how long your nest egg will last.

Living longer poses one of the biggest financial challenges to retirees. It requires thoughtful planning and good choices to improve our chances for success.

Stay Informed.

Monday Morning Money is a podcast talking about current events which  impact your bottom line.  

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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A More Conservative Approach

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What's Happening Now: A More Conservative Approach (4:36)

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Our Expectation: Stocks Will Act Like Stocks

We expect stocks to act like stocks. This means we believe—over the long term—they will perform well. They will generate the returns we need to improve our purchasing power and grow our assets.
 
It also means the growth won’t happen in a straight line. There will be periods of stress and pain along the way.
 
The market is at all time highs. And we haven’t seen a true bear market in over a decade. The current economic expansion is the longest on record. We felt it is time for a more conservative approach.  
 
Here is how we are doing it.

Step 1: Rebalancing

Rebalancing your account means we reset your asset allocation. Here is an example. A couple of years ago, John’s account had 60% of its value in stocks. The other 40% was in bonds. Because the stock market has done extremely well, the stock allocation grew to 65%.
 
Rebalancing his account sells some of the stock holdings and buys bonds. When complete, his allocation is reset back to 60% equity and 40% bonds.
 
In September, we will have an episode of Monday Morning Money about rebalancing.

Step 2: New Core Holdings

 Over the past two months, we have reviewed many of the core holdings in our portfolios. We determined several funds needed to be replaced. One of the by products of these changes was reducing some of the investment risk.
 
One tool we use to help measure the investment risk of our portfolios is a service called Riskalyze.  We measure the risk characteristics of the funds and ETF’s we use.  
 
Riskalzye also helps us to better understand how you feel about the risk and reward.  You can complete a brief survey to find your Risk Number.  There is a link below.  It costs nothing, and it takes 5 minutes or less to answer the questions.
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How Much is Too Much?

How much risk can you tolerate?  Would you be uncomfortable if your portfolio was down 10% in the next six months?  What about 20% or more?  Our 5-minute risk assessment questionnaire (powered by Riskalyze) will help you identify your appetite for risk and reward.  We can then take a look at your accounts to see if your investments align with the results. 

Taxes Matter

Most of these changes will occur in IRA’s or other types of accounts which don’t create a tax bill for you. If there are changes which need to be made in a taxable account, we will call you to discuss the tax implications.

Stay Informed.

What’s Happening Now is a podcast talking about current events which  impact your bottom line.  

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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The New DNA Testing Scam

There is a new DNA testing scam targeting retirees. We’ll talk about how they are doing it and what you can do to protect yourself on this episode of What’s Happening Now.

Listen Now: What's Happening Now-The New DNA Testing Scam

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  We’ll create a video or audiocast of the answer and post it here on our website, our Facebook page, and our YouTube channel.

Complete the form to the right to submit your question or comments.

Enter Your Question Here

Consumer Level DNA Testing

Over the past few years, there has been a rise in consumer level DNA testing. It has centered around finding out where in the world your family originated. Companies like Ancestry.com and 23 and Me have made these tests readily available.

Also, 23 and Me has an option where you can find out more about certain genetic health conditions. This can help you determine if you are at risk for certain hereditary diseases.

DNA Testing Scam

The New DNA Testing Scam

We received a notification from the Ohio Department of Insurance about a new DNA Scam. They target retirees and in some cases bribe them to complete DNA tests. And they try to convince their victims Medicare will pay for the tests.

They try to get critical information from you. They ask for your Medicare number and your Social Security number.

Medicare will only pay for the DNA test if they are medically necessary.

Sharing your Medicare or Social Security number can lead to identity theft.

Protect Yourself

Here are some steps you can take to protect yourself.

Consult Your Doctor.

Ask your physician if they believe a DNA test would be beneficial. If they believe it will, have them order the test. They will refer you to a reputable lab for the test. They will also be able to submit the request to Medicare.

Use One of the Known Consumer Providers.

We don’t have any experience with 23 and Me. And we cannot attest to their services or the results they provide. But they should be able to provide you some information at a published cost. And they should be able to do it without obtaining your Social Security number.

Do Not Share Your Information

You should not share critical information with people you do not know and trust. When someone has information like your Social Security and Date of Birth, they can do a lot of damage. Guard this information carefully and only share it with trusted sources.

Check With People You Know and Trust.

If you get a call like this, get the name of the company, a phone number, and the name of the person calling. Then do some research. Call your family, call your doctor, call us before you proceed. Let those around you help you do the research before you jeopardize your identity.

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Whether you’re married now, or were married, you should be aware of the provisions for Social Security spousal benefits. This allows you to receive an income based on your spouse’s earnings if their income was more than yours.

Here is how it works.

Computing Social Security Spousal Benefits

When you’re married, and you’re the lower earning spouse, your Social Security benefit will be

  1. Your own benefit based on your own earnings, or
  2. A spousal benefit equal to one half of your spouse’s earnings.

Here’s some numbers. (Click the images to enlarge)

Here are some key things you need to know.

Your Age Matters

Social Security reduces your benefits if you retire early. The spousal benefit portion of your income faces a bigger discount. So if you were born after 1960, your normal retirement age is 67. Your benefits get discounted 30%. The spousal benefit gets discounted 32.5%.  (Click image to enlarge)

The Higher Earning Spouse Must Also Receive Benefits

You can apply for your own benefits any time after age 62. However, you won’t receive spousal benefits until your spouse starts their Social Security.

So if your spouse continues to work, you can receive your $800 per month adjusted for your age. Then when your spouse retires, you can get the spousal benefit, adjusted for your age.

If Higher Earning Spouse Retires Early, It Reduces the Spousal Benefit.

Social Security computes your spousal benefit based on the higher earning spouses actual benefit.

So if the higher earning spouse retires early, the maximum spousal benefit will also be reduced.

Spousal Benefits Do Not Benefit From Delayed Retirement Credits

If you delay retirement beyond your normal retirement age, your primary benefit increases. The delayed retirement credits add 8% each year you delay your benefits until age 70. But these delayed retirement credits don’t apply to spousal benefits.

Your spousal benefit is capped at half of your spouses benefit at their normal retirement age.

The higher earning spouse will see their benefits increase for delaying retirement. But, the spouse will not. 

Bonus Tip:  Divorced spouses can file on their former spouse’s earnings record.

If you meet certain conditions, you can claim a spousal benefit on your former spouse’s social security record. Here’s how. (Click Image to Enlarge)

Your ex doesn’t have to be receiving their Social Security in order for you to file for spousal benefits.

And your age will factor into any discounts you may face.

Social Security has a lot of wrinkles and moving parts. And often times it can be tough to work through it.  Spousal benefits can have a significant impact on your retirement income.  Knowing some of the key decision points can help you plan for a better retirement.

Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  We’ll create a video or audiocast of the answer and post it here on our website, our facebook page, and our YouTube channel.

Complete the form to the right to submit your question or comments. 

Enter Your Question Here

The Inverted Yield Curve

The yield curve “inverts” when yields on short term debt exceed those for long term debt.  Right now the yield for 3 month notes is higher than 1 year, 3 year, 5 year, and 10 year bonds.

This has happened nine times since the 1960’s.  Seven of those periods came before a recession.

Whether it predicts a recession this time remains to be seen.

Last week we talked about the most recent Social Security Scam.  You can listen to that episode here.

Are You Planning For Retirement?

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

How Would A Roth IRA Impact Your Retirement?

We all know Roth IRA’s allow for tax free growth.  But how will a Roth IRA impact your retirement?  We’ll take a look at a couple of real life examples to show you the real value of these accounts.

Video: How Would A Roth IRA Impact Your Retirement?

Plan for A Better Retirement

We created Monday Morning Money with one goal in mind.  Give you information to inspire you to plan for a better retirement. 

We publish a new episode each week.  And, we will deliver it right to your inbox.

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The Common Example.

Every advisor has used this example at some point in time.  But it doesn’t provide any practical answers.

The Impact Example 1 - Monthly Income

Here is what we typically see. People retire. They have this pile of money, and they need to get some income each month. In most cases, at least to this point in time, the money has been in the traditional 401(k) or IRA accounts.

They set up monthly distributions from their accounts. But most people don’t like to pay quarterly tax estimates. So they have taxes withheld from those withdrawals.

So if we use the $600,000 accumulation from the first graph, and use the 4% rule, it works out to a gross monthly income of $2,000.  Here is how we see this work in real life.

But with the Roth IRA, there are no taxes.  You get to keep the entire distribution.  

Over time, the impact of this can be huge.  Over the course of 23 years, the amount of taxes you pay can be significant.

Let’s say you start at $2,000 per month.  You increase it each year for inflation.  Over 23 years, you’ll take total distributions of $750,000.  Of that, $150,000 would go to the state and federal government.  With the Roth, it all stays in your pocket.  That’s a pretty big impact.

 

The Impact Example 2 - Large One-Time Distributions

Here is the second way a Roth IRA would impact your retirement.  People will often need to take a larger one time distribution from their IRA. Maybe it is a car purchase, or a major home repair, or a vacation. They may call and need $10,000.

 If that money comes from a traditional IRA or 401(k), we  often have to “gross up” the distribution. They want to NET $10,000. That means we have to increase the amount they take out to cover thetaxes.   In this example, to get $10,000 they have to actually withdraw $12,500. The government gets that $2,500.

But if you use a Roth IRA, you take out $10,000 and the $2,500 stays in your account.

The Impact Example 3 - Required Minimum Distributions

We still see people who don’t depend on their IRA’s for income. And then they get to age 70 1/2 and get a nice tax surprise.

If the money is in a Roth, no tax surprise.

This also impacts inherited IRAs. You do have to take money from an inherited roth account. But unlike the inherited IRA, you don’t have to pay taxes on those withdrawals.

At least your kids will be glad you have the Roth IRA to pass on to them.

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What’s Happening Now: Chinese Tariffs and A Possible Stock Market Correction.

What's Happening Now: A New Series

Today we introduce a new series, What’s Happening Now.  The focus will be on current events which impact your investments and your retirement.  Our first video discusses Chinese tariffs and a possible stock market correction.

Audio Cast: Chinese Tariffs and A Possible Stock Market Correction

Audio Only

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We want to address the topics which matter to you.  If you have a question you would like answered in a video, fill out the form.  We’ll do our best to provide an answer.

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How Does Your Age Affect Your Retirement?

Last week we asked the question, “Will your retirement savings last 23 years?”  Today we ask, how does your age affect your retirement?

Video: How Does Your Age Affect Your Retirement?

Plan for A Better Retirement

We created Monday Morning Money with one goal in mind.  Give you information to inspire you to plan for a better retirement. 

We publish a new episode each week.  And, we will deliver it right to your inbox.

Don’t miss an episode, subscribe today!

Get Free Weekly Tips!

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How Does Your Age Affect Social Security?

We are eligible to begin Social Security retirement benefits at age 62. But if we retire before our normal retirement age, our benefits get discounted. The discount can be as much as 30%.
 
Delaying Social Security beyond normal retirement age means larger benfeits. Each year we delay, our benefits increase by 8%.
 
The income you need from savings depends on how much Social Security you receive. If you get less from Social Security, you need more investment income. When your investment income gets too high, you increase the risk of running out of money.
How Does Your Age affect Your Retirement

A Case Study: John and Patty

John and Patty are both 60 years old. They have accumulated $330,000 in their retirement accounts. Between contributions and earnings, their accounts should grow by $15,000 each year.

At normal retirement age, John will receive $2,000 per month in Social Security benefits. Patty will receive $1,500.

Remember, every year everything you buy costs more.  So John and Patty will need more income later in retirement.  

Let’s see how the age they choose to retire impacts the financial parts of their retirement.

how does your age affect your retirement

Click image to enlarge

Age 62 WD Rate
A 6.5% Withdrawal rate is high. It increases the risk of running out of money.
 
What happens if they wait?
Age 65

Click image to enlarge

Age 67 WD Rate

Better, But Still Not Ideal

Waiting an additional 3 years does two things.  It reduces the Social Security discount.  And, it gives them a chance to save more.

As a result, they need less income from their savings. And because they have more in savings, the withdrawal rate is better.  But it still isn’t ideal.

Age 67

Click image to enlarge

Age 67 WD Rate

That's Much Better

Now both John and Patty receive their full Social Security benefit.  And the additional years of compounding also help.  Now the withdrawal rate is 4%, which has a higher probability of success.

For good measure, let’s look at what happens if they wait until age 70.

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Click image to enlarge

Age 70 WD Rate

How Does Your Age Affect Your Retirement?

Time can be your greatest asset. And this is especially true if you aren’t as prepared for retirement as you hoped to be.

Early retirement discounts in Social Security benefits work against you. It places more responsibility on your nest egg for your income needs. And we believe the biggest threat to your retirement savings is your withdrawal rate.  

If you are able, working a few extra years should improve your retirement picture.  Those early retirement discounts disappear.  And the extra time you have to save won’t hurt either.

Watch Other Episodes of Monday Morning Money

Catch up on the previous episodes of our weekly video series, Monday Morning Money.  You can also see them on our facebook page and our YouTube channel.

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