Today Jag and Amy delve into five common myths surrounding retirement planning. Amy, leveraging her 20+ years of experience as a financial advisor, deconstructs each myth, providing insights grounded in real client interactions.
First, they address the myth "I'll spend less in retirement," discussing how retirement often brings new expenses, such as travel, hobbies, and healthcare, which may not decrease spending as expected. While fixed costs like mortgages might end, discretionary spending and healthcare needs can actually rise.
The second myth is the belief that being debt-free in retirement equates to reduced expenditures. Amy explains that having low-interest debts like mortgages during retirement isn't necessarily bad if the returns on investments exceed the interest rates, emphasizing the importance of financial planning over simply clearing all debts.
The conversation then shifts to the effectiveness of employer-sponsored retirement plans like 401(k)s and 403(b)s. Amy argues that merely saving the maximum in these plans may not suffice for a comfortable retirement due to factors such as investment choices, duration of savings, and the timing of retirement, highlighting the complexity of retirement planning.
The fourth myth tackled is the idea of downsizing homes in retirement. While some may intend to downsize, Amy points out that emotional attachments and the physical demands of moving often keep people in their current homes longer than planned, complicating the downsizing process.
Lastly, they debunk the myth that taxes will be lower in retirement, with Amy warning that retirement income can trigger higher taxes and health insurance costs under Medicare's IRMAA surcharges. She stresses the importance of strategic financial planning to manage these potential increases effectively. Jag asks about the possibility of tax increases in the coming years.
Throughout the podcast, Amy and Jag emphasize that effective retirement planning requires a holistic approach, considering not only savings but also spending strategies, tax implications, and personal circumstances to ensure financial stability and fulfillment in retirement. They conclude by reminding listeners to consider retirement as a phase requiring its own unique set of strategies and preparations
Jag:
Welcome back to ThimbleberryU. I'm Jon Jag Gay. I'm joined as always by Amy Walls from Thimbleberry Financial. Amy, we're going to have some fun today.
Amy:
Good. Do we not normally?
Jag:
No, I just hope you feel that way because you had the idea for today's podcast episode. So, let's roll with it.
We're talking about five myths of retirement planning. I know you, there are a lot of times that you deal with clients that they're thinking about or have misconceptions about retirement and what that might look like. So, you're going to throw some of these out today and we'll discuss them. Where do you want to start?
Amy:
Let's start with, “I'll spend less in retirement.”
Jag:
You would think that because they don't have the same day-to-day responsibilities. Maybe they're not paying for kids' piano lessons and soccer or even putting their kids through college depending on how old they are when their kids go to college. And then just the day-to-day stuff of life. I can see why people would think that.
Amy:
And the myths we're talking about are from my experience, as a financial advisor for the last 20 some years. So, yeah, you're exactly right. It's also, we hear stories of people retire and they need to spend less.
Jag:
Sure.
Amy:
Our clients, people we work with in tech and in healthcare, have planned. They've saved. They want to make sure when they retire they're going to get the life they want. That's how we approach planning and helping our clients.
And so, when we look at it from that perspective, they don't want to have to take a step back because usually they've got hobbies or activities that they want to be pursuing. You mentioned the kids' activities have gone away, but there's new travel, there's exercises and competitions and whatever it might … art. And oh gosh, art supplies.
Jag:
Yeah. Those aren't cheap. I also got to imagine, you mentioned the two specialties you have at Thimbleberry in the tech world and in the medical world. Typically professionals in those two fields work a lot of long hours. So, I would imagine in retirement it's like, “Hey, I'm not working 60, 80 hours a week. Look at all this time I can find to do things I want to do.”
Amy:
Yeah. And things that they just didn't have time for. And I'm going to say more in healthcare, I hear this, there's a desire for a more creative outlet. Many of our tech clients have that creative bent too, but they find a way to do a little bit of it while they're working. Because they feel like it keeps them fresh.
But our clients in healthcare, I tend to find they're thirsty for it. That's the only word I can come up with. They're thirsty for it. So, whether it's redoing an old car or turning a bus into a van type camping-
Jag:
Hashtag van life.
Amy:
Yes, exactly. Buying another property that is a place they can relax but is also a place they need to nurture and that needs care. Those are the activities they need and there's costs associated with that.
Sometimes it's small, sometimes it's big, but it's an outlet that is a need, like thirst. And then the thing that we haven't talked about is, it usually happens later. It's healthcare costs. This also can happen earlier if someone retires early because they're going to be paying out of pocket in many cases for their health insurance.
Jag:
That's something I've seen with folks in my life. Typically, you don't get more healthy as you get older. So, things start to wear down a little bit.
Amy:
Yeah. There is one more thing I'll say that people factor in when they say they'll spend less in retirement. And from my perspective as a financial advisor, it kind of fits in a different category.
But they're thinking, “I'll be debt free; my cars will be paid off, my house will be paid off when I retire, therefore I'm going to spend less.”
Yes, that could be true. However, when I think most financial advisors, at least, and I could speak for myself and many of my friends on this, how we're looking at it is liabilities, a mortgage, car payments, et cetera, they’re liabilities rather than expenses.
Expenses are going to be ongoing. Whereas those liabilities, it's a set payment for a period of time and then it's gone. So we've already considered that as something different than a regular expense going forward.
Jag:
Okay. Let's dig into that a little bit more as a myth about being debt free. I think there's this idea that we, by the time we retire, if all goes according to plan, everything's going to be paid off and I'm living my life scot free. And that's probably not the case.
Amy:
I'd say this is our myth number two. So, first paying off a mortgage at or before retirement may not make sense. Especially when we've got all of these not very old, 2 to 3% mortgages floating around.
Jag:
I'm thinking about that ReFi we did a couple years ago. Yep.
Amy:
Yeah, if you are paying 2 to 3% and your investments are earning more than that, would you want to take money out of your investments to pay this mortgage off?
Jag:
I think that’s a point that we've made previously, but really bears repeating, which is, it's simple math. If you're spending two to three but you're making four or five, six, then yeah, why would you worry about two to three down, when you're four or five, six up and net positive?
Amy:
Yeah. And Jag, what I'd say there is, I like where you're going. Maybe if we're at 4 to 5%, we might consider paying off the loan because 4 to 5% might be in any one year versus it being lower in some years and higher in others. That can be a hard pill to swallow if all of a sudden that's negative.
But if we're 5, 6, 7, 8 consistently, and we want to look at this for the long-term, if your mortgage is 30 years, you want to compare it to investments that are 30 years.
Jag:
Apples to apples. Got it.
Amy:
Yeah. You generally aren't going to want to pay off a low interest mortgage with assets that are earning more.
Additionally, it may not make sense because of where you have your money positioned. So, Jag, imagine you are considering paying off this mortgage. Maybe you just bought a new home and it's at a higher interest rate.
But the way that you've saved for retirement is through 401(k)s and 403(b)s and employer sponsored retirement plans that are all pre-tax money. Now to pay off, let's just say even a hundred thousand dollars balance of this mortgage, you're going to have to pull a hundred thousand dollars out plus the tax bill for the hundred thousand dollars of extra income you are going to have in that year.
And you just made paying that off much more expensive perhaps by throwing yourself into a higher tax bracket than if you just continue the payments.
Jag:
Comes back to the plan, the plan, the plan.
Amy:
And Jag, I think since we're using this example of a mortgage, the same goes for car purchases. This is something that I always try to remind clients of as they are moving towards retirement. In retirement, I imagine you might be thinking you're always going to pay cash for any new vehicles. The answer is almost always well, of course, cool. And we'd love for that to happen.
But let's talk about where if you were to buy a car you would pull money from given that X, Y, and Z is your distribution strategy for normal expenses.
Jag:
Got it. Okay.
Amy:
Well, if I pull it from there, that means that's my immediate bucket. So, that doesn't let that money last as long. So, now I'm going to come back here to these taxable accounts. Okay, well I pull the money out, but again, this car purchase just got way more expensive if we pull all the money out at one time perhaps. And we've got to weigh that against tax brackets, of course. And overall income.
Jag:
Apologies for mixing cliches and metaphors here, but it seems like you're getting distracted by a shiny object in this case. And then you're robbing Peter to pay Paul. Sorry, I know that's two cliches at once, but I think they play together there.
Amy:
They do.
Jag:
Let's talk about the retirement accounts since we're kind of going down this road anyway. I mean like 401(k)s, 403(b)s. What do you see for misconceptions when it comes to that?
Amy:
If I save the maximum amount that I can each year into my 401(k) or 403(b) employer sponsored retirement plan, plug in whichever one you want, I'll have enough money to retire.
Jag:
That's also the easy way out of “Oh, if I just do what my employer offers me, I don't have to touch anything. I'm good. I'm good.” But I'm guessing that's probably not the case.
Amy:
It might be for some people; it all depends on what their income is and what their expenses are.
Jag:
Well, there you go. You said it depends.
Amy:
But I would argue that for our clients, no, it's not going to be enough in most cases. And there's different factors that go into this. One, how did they invest? And so, if they were incredibly conservative that money didn't grow much. If they were extremely aggressive, perhaps that was great. Except maybe the market turned, right before they retired.
How long were they saving? I remember when I was in my 20s way before I was a financial advisor, I’m aging myself for our listeners here. Because I did become a financial advisor in my 20s though. But earlier in my twenties I remember having dinner with a group of my college friends and I had started saving for retirement. It was a year out of college.
Jag:
This is my surprised face.
Amy:
And I brought it up at dinner and said, “Are you guys doing this?” And they all looked at me and said, “That doesn't happen until we're 30.”
Jag:
Also, this is my surprised face.
Amy:
And so, how long were you saving? Another thought, we've touched on early retirement. What's early? 65 is what people throw out as standard. So, when I use early, and I'm really saying anything before that.
But perhaps somebody wants to retire at 55 and they have enough money, but all of that money is in one of these employer-sponsored retirement plans. Technically, there is a way to get at that money. It's a bit complicated, but at age 50, that's even harder.
So, you may not have money in the right spot. You have no flexibility if all of your money is in these pre-tax accounts.
And then the other problem with this myth we've touched on, but to call it out explicitly, it's taxes. If everything's pre-tax, everything you do in retirement is taxed. Guess what? Your house needs a new siding, $40,000 expense. Boom. That $40,000 expense maybe just started costing $60,000.
Jag:
Yeah. If you didn't pay the taxes on that retirement money on the way in, you got to pay it on the way out when you need the money.
Amy:
Yeah. So, that's why the 401(k) or 403(b) alone likely is not going to be adequate.
Jag:
It just speaks to them being specific tools in the overall plan, the strategy you work with on your clients. What's your next myth, Amy?
Amy:
“I'll downsize my home in retirement.” Maybe not immediately, but later on. I love this one. And when I say I love it, it's a great conversation because people really think I'm going to do this. And some do. Some do. And I've seen some statistics recently from the Realtors Association.
Jag:
National Association of Realtors. Yeah.
Amy:
Yep. That people over 65 when they sell usually do downsize. But if you take that statistic a step further, 90% of people don't want to move out of their house.
Jag:
That's fair. All the emotional attachments they have to their home, the memories they have there, I'm thinking of the proverbial tick marks on the wall as your kid grew to the different heights along the door jamb. That that's kind of what I'm picturing.
Amy:
Absolutely. And raising your grandkids in that environment, getting to experience them doing the things your kids did in that space. All of that's attached. So, it's a great idea.
Jag:
And part of the fun of being a grandparent is being able to silently judge your kids for the way they raise their kids, right?
Amy:
Absolutely. My kids, we have conversations regularly at the dinner table about what we'll be allowed to do with our kids and how they will raise their kids compared to how we raised them. They already have some ideas.
Jag:
That's a whole other podcast. Yes.
Amy:
Yes. I'm not sure it's a ThimbleberryU Podcast. But another thing to consider is that — actually two things come to mind. One is the financial considerations, moving is expensive.
And so, again, going back to what we talked about with money, just being in an employer plan is money in the right buckets. Do you have enough liquidity, meaning without tax consequences, to make buying another home, selling yours, all happen.
At least in our part of the country, it's unlikely you're going to get an offer accepted that's based on you selling your home. So, you're going to need the liquidity for a down payment then a mortgage, let alone moving until your house is sold, so-
Jag:
Right. True all over the country as we record this here on April 10th, 2024.
Amy:
Yeah. Also with downsizing, one of the things that even we've seen for people who do want to downsize is they don't have the energy to do it.
Jag:
That's a great point.
Amy:
As they age, that becomes a bigger struggle. They don't have family that's able or willing to help them through that or they won't ask for the help they need. And so, I've seen downsizing that has been a yes, we'd like to do this now, be a very long conversation and by long I don't mean two or three years. I mean 5 to 10 years of this is what we want, and we just can't get going on it.
Jag:
And that's kind of a double-edged sword because you have on one hand the emotional piece of it, you kind of kick that can down the road, but as you get older, you may have some physical limitations that make the move that much harder because you waited. So, you're almost weighing the emotional versus the physical at that point.
Amy:
Absolutely.
Jag:
Alright. Last on our list, Amy, of five of the top myths to retirement planning. What do you got?
Amy:
“Taxes and retirement don't matter. I'll be in a lower tax bracket.”
Jag:
We could go all day on this one.
Amy:
I could. This alone could be a topic. Here's what I'm going to say. We've alluded to this throughout the other things we've talked about, obviously where you've saved matters, flexibility matters. This goes back to our very first podcast, 111 episodes ago.
Jag:
I knew you'd have the number off the top of your head.
Amy:
Other things that play a role is as income goes up in retirement, taxes go up. Once you're age 65 and on Medicare there is also something called IRMAA. And basically, IRMAA is a surplus charge when your income was higher than the standard threshold, they expect it to be to be receiving Medicare.
So, people are charged for Medicare. You pay for it, it's not a lot, but if your income exceeds certain thresholds, they increase the cost. And so, health insurance through Medicare becomes more expensive as your income goes up.
So, we talk about “taxes don't play a role” or “the taxes don't matter.” Like okay, I’m going to buy this vehicle and I'm going to pull everything out of my IRA, cost goes up, no big deal.
Well, one of the possible ramifications is that down the road, as a result of your taxes for that year where you took out an extra $70,000, for this car purchase plus taxes, you now are going to pay more for health insurance.
Jag:
So, it feeds on itself in a way.
Amy:
Absolutely. So, taxes do matter. Flexibility matters. Having a smart place to get at money matters and all of that contributes to … being mindful of that means that you have a better chance of living the life you want to live and retire.
Jag:
And another thing I've heard too, Amy, and again we don't get political on this show, but with potential ramifications down the road for social security and Medicare, Medicaid, there are some who believe taxes are going to go up in the future as opposed to where they are now.
Amy:
Jag, I think that it's probably likely that taxes will go up. We don't have a crystal ball or a magic eight ball that can tell us for sure.
Jag:
But you're saying signs point to yes.
Amy:
Yeah. I anticipate that. And because we're planning, it doesn't make sense to plan for best case scenario only.
Jag:
Right. That's a great point.
Amy:
We want to plan more for the worst case scenario and know we're still okay.
Jag:
Yes.
Amy:
So, that means while right now taxes may not matter as much, it definitely could be a bigger bill in the future. Meaning less fun, less life.
Jag:
Right. I think the overall through line here, Amy, I think for so many of us, we work for 20, 30, 40, 50 years, whatever it is, with this light at the end of the tunnel being retirement and this idea that, okay, I got to get to retirement, I got to work, work, work, save, save, save, get to retirement.
But my real takeaway here is retirement is just the next phase. And there's a whole different set of rules and variables. Just like in your working years, you have to have a plan and you have to prepare for all kinds of issues and contingencies.
Amy:
Yeah. Jag, I like that. And maybe that could be another episode. But there are phases of retirement leading up to retirement and in retirement and gentleman by the name of Ken Dychtwald, Dr. Ken Dychtwald, I think we've talked about him previously, has done the work around those phases.
And it's really important to know that these stages are likely to happen. But what I think you're touching on is even different than that as the underlying “issue,” per se, is that we go from structure of incomes coming into all of a sudden “I have all these accounts, I do whatever I want when I want.”
And there's more of a behavioral pattern or issue, some it's not eating all the Easter candy from the Easter bunny all at once. It's spreading it out and being able to not to have instant gratification, that's important.
Jag:
Advances in medicine, people are living longer. So, I think nowadays we have to, now hopefully, knock wood, in an ideal situation, plan for a longer retirement than maybe our parents or our grandparents did.
Amy:
Absolutely. Right.
Jag:
Amy, if somebody wants to come talk to you at Thimbleberry Financial about their financial future, their retirement, or anything related to that, how do they best find you?
Amy:
They can find us online at thimbleberryfinancial.com or by giving us a call at (503) 610-6510.
[Music Playing]
Jag:
Good stuff, Amy. We’ll talk again in a couple weeks.
Amy:
Sounds great, Jag. Look forward to it.
Jag:
Securities offered through registered representatives of Cambridge Investment Research, Inc, a broker-dealer member of FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research Inc, a broker-dealer member of FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.