In this episode of ThimbleberryU, Jon “JAG” Gay and Amy Walls tackle one of the biggest fears for retirees: running out of money before they die. They delve into the critical topic of deciding from which accounts to draw money in retirement, illustrating the profound impact these decisions can have on one's financial stability.
Amy emphasizes that this concern often leads people to adopt an "ostrich" mentality, where they bury their heads in the sand to avoid facing daunting financial decisions. Jon adds that this behavior is a form of fight or flight, driven by fear and unfamiliarity. They agree that simply winging it can be a costly mistake.
We introduce a case study to illustrate these points. They discuss a hypothetical couple, both aged 60, with different types of savings: $40,000 in cash, $600,000 in taxable investments, $2 million in IRAs, and $200,000 in Roth accounts. They compare the financial outcomes of spending $85,000 versus $100,000 annually in retirement.
Deviating from these strategies, even slightly, can significantly impact financial outcomes.
The consequences are even more dramatic when retirees choose to withdraw 100% from either taxable accounts or IRAs.
We underscore the importance of dynamic financial planning, which involves regular reassessment of one's strategy to adapt to changing circumstances and ensure efficiency. Amy concludes by stressing that thoughtful distribution strategies are essential not only for maintaining financial stability but also for achieving personal goals, whether it’s enjoying life, covering unexpected expenses, or leaving a legacy.
For listeners seeking personalized advice, Amy encourages reaching out to Thimbleberry Financial for guidance tailored to individual circumstances.
Jon (00:02):
Welcome back to ThimbleberryU. I'm Jon “JAG” Gay. Amy Walls from Thimbleberry Financial joins me as always. Hello Amy.
Amy Walls (00:08):
Hi Jag.
Jon (00:09):
So, one of the biggest fears that retirees have is not dying- it's running out of money before they die. That strikes fear into the very guts of people. So, today we're talking about where you pull your money from in retirement and what a titanic impact that can have on your finances after you're done working.
Amy Walls (00:33):
Yes. Jag, it really does. And I think this is something that is so easily overlooked. First, I think as humans we are like ostriches. We bury our head in the sand in many cases because it lets us just stay focused on what we know.
Jon (00:55):
Yeah.
Amy Walls (00:56):
And not worry about what we don't know. And it's not a knock on anybody who's doing that. It's, I think a protective-
Jon (01:05):
You know what it is, Amy? I think it's fight or flight because some of this stuff is so intimidating and scary. That's where the ostrich part comes in. “You know what? I've got my money; I've got my savings. I'm just going to wing it because diving into this and figuring it out is unfamiliar, it's overwhelming, it's scary. So, I'm just going to go with my gut.”
And that can be a really expensive mistake as we're going to look at in a hypothetical case study today.
Amy Walls (01:27):
Yeah. So, when we do that, we're often going to choose the route that just seems the easiest. Logically, I can explain this away. This seems the easiest. And I think in doing that, we don't often recognize that's what we're doing. We're just doing the thing that came to mind.
And so, we may not know that that was a choice, because it's the only option we saw. So, were there other choices? Maybe not. Didn't seem like it.
Jon (01:56):
You reminded me of the infamous Yogi Berra quote, “When you come to the fork in the road, take it.”
Amy Walls (02:00):
There we go. And like you said, any of those choices would have a financial impact. Another thing that I want to touch on is before we really dive into this, is there are some rules of thumb out there.
And when we know enough to be dangerous, hey, this rule of thumb seems really popular, therefore I'm going to use it to make my determination on which account I draw my money out of. It might work, but it might not work.
And I just hope … this is, I think our first time doing a case study. I'm really hoping our listeners will gain something out of this. Be surprised by how big of a change this can be and how important it is to evaluate the options.
Jon (02:45):
And I do want to mention, since we're starting here, Amy, with this case study, we're going to throw out a lot of numbers today and we're going to hopefully make it as easy to follow as possible on an audio podcast. But we are going to put all these numbers in our show notes.
So, if you're somewhere where that's safe to look at the show notes. You're not driving or anything like that, you can feel free to look at the show notes below and follow along as we're talking here. So, what are the basics our listeners need to start this conversation?
Amy Walls (03:08):
Yeah, Jag, this all goes back to the beginning, the beginning of the ThimbleberryU Podcast, episode one.
Jon (03:15):
In the beginning.
Amy Walls (03:17):
In the beginning, there were three ways that you can save money. One way is pre-tax dollars that when you pull this money out of retirement accounts, it's going to be taxed in the same way that your paycheck is taxed.
The second way is after tax dollars. These are not protected by any sort of retirement plan umbrella, if you will. And really your tax is capital gains and dividends on these dollars. So, preferential tax rates.
And the third way is through money that pays out to you, tax free, Roth accounts are the easy thing that comes to mind in this.
Jon (03:56):
Sure. Yep.
Amy Walls (03:57):
And so, in episode one, which I would encourage listeners that haven't listened to go back and listen, I think everything in that still applies. The importance is to have choice in retirement, to have flexibility in retirement as to what the best way to recreate a paycheck from your accounts is means we need to have money in different areas. And I think in our case study, we'll see that today.
Jon (04:27):
Okay. So, let's start with our case study. Again, we're going to put these numbers in the show notes. Give me the parameters of our starting point, Amy.
Amy Walls (04:34):
Yeah. So, we're going to talk today about a couple that they're both age 60 and their financial situation, at least in terms of investible assets looks like what I'm about to describe.
So, they have cash accounts of about $40,000. Let's call that cash account small for what they should have, knowing that they are in retirement. Taxable investments, that second bucket I talked about on the triangle of about $600,000. Third IRA money, 401(k) money of about 2 million. And Roth money of about $200,000.
Now I'm going to do a comparison between having their expenses be $85,000 a year versus $100,000. Now as I do this, I'm really looking at what we expect ongoing expenses to be. I didn't factor in, hey, periodically we're going to take this extra big trip, or I end up with a $50,000 home repair that is going to happen two more times in our life. We've tried to factor those kinds of costs into these ongoing expenses.
Jon (05:50):
Got it. Okay.
Amy Walls (05:51):
Also, note for someone with this scenario that I've described, both spending at $85,000 or $100,000 seems sustainable through the end-of-life expectancy, which we're going to use 95.
Jon (06:04):
Alright. So, $85,000 versus $100,000 in terms of their ongoing spending per year, all numbers rolled into that. What choices do they have when it comes to drawing down from various assets?
Amy Walls (06:15):
Before I can explain that, let me address that what I am looking to do here is give them the most amount of spending money as they can have the biggest opportunity. So that, as we said, if they're spending $100,000 a year, we have as small a likelihood as possible that run out of money.
We want their chance of success, if you will, the probability of success to be as high as possible. So, to do that, what I need to be able to do is to balance out their tax bills across the different spending scenarios of $85,000 or $100,000, which is how the client gets to keep more.
So, what I did here is in both the $85,000, and the $100,000 scenario, given the asset breakdown that I described, I said, and knowing that they're age 60 right now, what is the best place if this is what they're spending to have them draw the money from?
Now if we tie this back to what I said earlier, sometimes we don't know what a choice is. So, someone may just go, “Oh hey, they've got enough money for a while in taxable accounts.” This is kind of one of those rules of thumb. “Let's just draw everything from there for a while. Even at $100,000, that's going to last them six years unless the market declines.”
Jon (07:36):
That's back to your original ostrich point. It's just the easy path in front of you. Not giving much thought, I'm just going to, hey, do this.
Amy Walls (07:43):
Yeah. Another easy thing that people may come up with is, well, they've got plenty of money. $2 million in IRAs. Let's pull that a hundred thousand out of there. It's like earning a hundred thousand dollars on a paycheck.
Well, it's actually would be earning more because it would be a hundred thousand net.
Jon (08:03):
Because It's not taxed.
Amy Walls (08:04):
And so, hey, we'll just figure out that math and we'll pull the money from there. This is easy. So, before I jump into those numbers, which I find very surprising in this, let's compare the $85,000 to the $100,000. In this scenario, for $85,000 as I analyzed it, the best scenario was for them to draw from taxable accounts and IRAs together.
The same's going to be true for the $100,000. but for $85,000 of total expenses, it was taking that shortage to recreate the paycheck with 45% of it coming from taxable investments and 55% coming from IRAs.
Jon (08:51):
And it's worth mentioning here that you have software, you can run these numbers as you've done for our couple in this example. So, if they want $85,000 a year in spending money, the ideal when you run the numbers is not to go all one. Not all the other, not even 50/50, but for this specific scenario, 45% withdrawal from their taxable assets. 55% from the IRA.
Amy Walls (09:12):
Correct. That was for $85,000 of expenses. Now to spend $100,000… $15,000 more doesn't seem like a huge difference.
Jon (09:25):
Not in one year, but in 35 years of retirement, I can see where that would add up. Yeah.
Amy Walls (09:31):
Exactly. The best scenario switches so that instead of drawing 45% from taxable investments, it's actually drawing 60% from taxable investments. And 40% from IRAs.
Jon (09:44):
So, again, a split, but a much different split based on the numbers.
Amy Walls (09:47):
Yes. And the real reason there is we're talking about a hundred thousand dollars of spending. And so, by dropping the IRA amount, we're keeping the tax bill a bit lower today and into the future.
Jon (10:03):
So many variables to consider that you really have to think about all of it. Okay.
Amy Walls (10:07):
Yep. So, now let's just say though that someone's going to spend a hundred thousand dollars and they keep the strategy that worked for the $85,000. And they carry this forward basically indefinitely until one of the buckets runs out, probably the taxable bucket first, and then it would be a hundred percent IRA.
If that were to happen and they used a 45% taxable distribution and a 55% IRA distribution, by age 95, they will have had about $400,000 less in spendable money.
Jon (10:40):
Wow.
Amy Walls (10:42):
Now, if they spend $85,000 a year and they used the strategy that was best for $100,000, which was 60% from taxable accounts and 40% from IRAs, they'd have $300,000 less.
Jon (10:57):
So, you're talking $400,000 or $300,000 less, respectively, based on just a tweak to the percentage of the mix. Again, when you factor in what they're spending every year.
Amy Walls (11:07):
Yes.
Jon (11:08):
That's stunning.
Amy Walls (11:10):
And know that on these numbers, I should have said this earlier, the $85,000 and $100,000, I did account for inflation each year on those numbers going forward.
Jon (11:19):
Okay. So, I think I know the answer to my next question, but I'm going to pose it to you anyway. So, obviously there’s a big significant difference in the distribution of where you're pulling the money from. I've got to imagine that number skyrockets if they went a hundred percent one way or the other between the taxable and the IRA.
Amy Walls (11:34):
Yes. Good call, Jag. So, I only ran this for this, just didn't want to overwhelm our listeners with data points. But this is where I can geek out. If they're spending a hundred thousand dollars and they withdraw a hundred percent from taxable accounts until those accounts run out and then switch to the retirement assets, they would end up with $740,000 less.
Jon (12:00):
Yikes.
Amy Walls (12:01):
And if they just decide, hey, we're going to pull this $100,000 plus taxes, a hundred percent what we need from the IRAs, just like in the other scenarios, but a hundred percent IRA this time, they will end up with $1.5 million less.
Jon (12:16):
I had to pause and let that number sink in for a second. Okay, alright. So, to sum this up, Amy, the client is better off anywhere from 300,000 to 1.5 million dollars based on where they withdraw the money from. Some pretty big ranges and nothing to sneeze at.
But let me ask you this, if they're at the end of the day, okay, financially in any of these scenarios, why put all this emphasis on it?
Amy Walls (12:44):
Well, Jag, you said it upfront, what is typically a retiree's biggest fear?
Jon (12:49):
Their money running out before, essentially, they do.
Amy Walls (12:52):
Exactly. So, in this scenario or with this information, some people will care, and some people won't care. But why I believe as a financial advisor it matters, is that my job is to help people live the life they want to live. To do the things.
If somebody has a really high success rate, well, what else do you want to do in life if that's what's important to you? Who else do you want to give money to if you want to see that happen?
So, money helps meet goals. Money is a means to do things in your life whether that's fun for yourself, things that bring you joy, whether it's unexpected expenses, so let's say medical expenses, maybe it's a big issue with the house that insurance isn't going to cover. And in this scenario, we didn't factor in long-term medical costs. If they got sick.
Jon (13:54):
And you're talking (age) 95, that could be a very strong possibility.
Amy Walls (13:57):
Yeah. And so, $300,000 to $1.5 million, that makes a big difference on difference how that care might be provided if that comes up.
Jon (14:07):
And I got to mention beneficiaries too. If you want to leave something behind.
Amy Walls (14:11):
Absolutely. whether you want to leave it behind when you're no longer here, or you want to give it ahead, meaning gifting while you're still alive so that you can see the joy that that money is bringing to others.
Jon (14:27):
I always love that idea is give it to somebody while you're still here to see them enjoy it. I always kind of like that, and obviously every financial situation is different.
But I got to tell you, Amy, this has been really eye-opening for me. Knowing that small tweaks to your distribution in retirement over time, ideally, we all have a 30/40-year retirement, but over time, that can just add up to such a massive number.
And it really speaks to why you want to work with a financial planner or advisor, but also have that plan be dynamic and not static. It's not set it and forget it. And again, ostrich, stick your head in the sand.
It's continually reevaluating as your spending changes, as your life happens and making sure that you're always doing it in the most efficient and smart way for your situation. So, if one of our listeners wants to talk to you about their retirement or anything regarding their finances, how do they best find you at Thimbleberry Financial?
Amy Walls (15:18):
Yeah. They can give us a call, our number's 503-610-6510, or they can find us online at thimbleberryfinancial.com.
Jon (15:27):
Again, eye-opening stuff, Amy, today. And we can go back and let's look at episode one as well and any of our previous a hundred plus episodes, we'll talk again in a couple weeks.
Amy Walls (15:35):
Sounds great.
Jon (15:36):
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.