In this episode of ThimbleberryU, we begin a two-part series debunking common myths about retirement. Jag and Amy Walls dive into the misconceptions that many people have when planning for their post-work years.
The first myth we tackle is the belief that you need $1 million to retire comfortably. Amy explains that while this is often thrown around as a benchmark, the reality is far more nuanced. Retirement comfort depends on various factors like social security, pensions, and personal expenses. Many retirees live well on less than $1 million, provided they have a balanced financial plan and modest needs. Everyone’s situation is different, and it’s important to consider your own income sources and expenses, rather than focusing on an arbitrary number.
Next, we explore the idea that retirement means never working again. Amy highlights that many retirees continue to work part-time, start businesses, or freelance to stay active and fulfilled. In fact, 56% of retirees plan to work in some capacity after retirement, according to a Transamerica study. Interestingly, however, studies show that those who make a clean break from work tend to be happier in retirement. The trick is finding purpose, whether through work, volunteering, or family.
We also address the common belief that downsizing your home will always save money. While this might seem like a logical step, it doesn’t always pan out financially. Real estate fees, moving costs, and potential renovations in the new home can eat into savings. Additionally, many retirees find themselves emotionally attached to their homes, especially when considering family gatherings or memories, making downsizing less appealing or practical.
Another popular myth is that all debt should be paid off before retirement. While it’s a comforting idea to enter retirement debt-free, it’s not always necessary or even beneficial. Amy notes that paying off debt might require large withdrawals from retirement accounts, which can lead to significant tax consequences. Instead, it’s important to assess your cash flow, the interest rates on your debt, and whether paying it off makes sense in the bigger picture.
Finally, we debunk the notion that Medicare will cover all healthcare costs. While Medicare is essential, it doesn’t cover everything. Gaps like long-term care, dental, and vision expenses can add up, with retirees needing an estimated $315,000 to cover healthcare costs. It’s crucial to plan for these expenses early and consider supplement plans or health savings accounts.
In our next episode, where we’ll tackle five more retirement myths.
Jon Gay (00:04):
Welcome back to ThimbleberryU, I'm Jon Jag Gay. I'm joined as always by Amy Walls from Thimbleberry Financial. Amy always going to be with you.
Amy Walls (00:09):
Jag, it's great to talk to you.
Jon Gay (00:11):
And over this podcast and our next episode, we're going to be debunking 10 of the most popular retirement myths. I love this idea.
Amy Walls (00:19):
I think it'll be a lot of fun. There are a number of myths out there, and they all have roots somewhere, but what's the truth?
Jon Gay (00:27):
And this kind of converges your interest in behavioral finance as well as the actual numbers behind it, so we'll jump right into it. The first myth that I hear all the time about retirement is you need $1 million to retire comfortably, is that true?
Amy Walls (00:42):
Well, Jag, imagine you are retired, imagine that you have $700,000, you have social security coming in, and you have a pension that pays you $60,000 a year. That $700,000 is going to pay out somewhere probably around $30,000, using roughly the 4% rule.
So, my question to you is, between social security, between the pension and an additional $30,000 a year, does that more than cover your expenses?
Jon Gay (01:27):
Without running the numbers, that's a tough question to answer, but I would think the answer would be sometimes, or your favorite answer, it depends.
Amy Walls (01:36):
There you go. So, my point here, Jag, is now imagine a scenario where you have $3 million producing $120,000 in income a year but you don't have that pension. Are you okay? We can have these two scenarios where they could be equivalent in terms of the dollars coming in, but it's the makeup of where income is coming from that matters.
So, the reality is that less than half of retirees have $1 million saved. Yet many do live comfortably. What do they pair that with and what are their expenses? What are their goals? That's what's important.
Jon Gay (02:22):
I think as I think about this, $1 million is a nice big round number and it's not to insult anybody, but having that thought, it's almost lazy. Like, “Ah, it's a million dollars. Let's just call it a million dollars.”
But you're right, it's going to depend on what you need based on your spending and your personal expenses every week, month, year and then also what you have to supplement that. So, that $1 million is just really, is kind of an arbitrary pie in the sky number.
Amy Walls (02:48):
It really is and it matters: Is it in $1 million in IRAs where it's taxed at ordinary income rates, which depending on the other things, matter. Or is it $1 million in a taxable account and everything's been held more than a year, and so you're getting long-term capital gains rate, let's assume at 15%. Wha are the taxes happening when you’ve realized those dollars, realized the income from that money?
So, there's so many variables, but the fact of the matter is, many people live on retirement assets of less than a million dollars. But it all comes down to what's the lifestyle … at least from my perspective, it all comes down to what's the lifestyle you actually want to achieve? Why did you save this money?
Jon Gay (03:35):
What do you have coming in? What do you have going out? Second myth: on the flip side, some folks think retirement means not working at all. “Okay, I've put my time in, I'm done working.” Is that true for everyone?
Amy Walls (03:46):
Well, I am going to say no because we’re debunking myths, so the real question you want to ask me is why is that not true? Retirement looks different for different people, just like we just talked about in terms of what their goals are.
Many people choose to work part-time, start a business, freelance during retirement, I've had many clients say they want to work at a bookstore. So, Jag, you host podcasts for a living. For all our listeners you might not have known, that's why Jag and I do this together, he helps me out with this.
Jon Gay (04:18):
Appreciate the plug.
Amy Walls (04:20):
And imagine you are able to retire but I know you love what you do. Same way, I love what I do and maybe you don't want to do it so many hours a week, so you want to keep a couple clients that you work with as you head into retirement and that's a few hours out of your month.
Jon Gay (04:42):
I think a lot of it comes down to bandwidth, how much you want to put in. I know there have been times where after a long holiday, weekend I'm antsy and I want to do something. So, I think that has a lot to do with how much you want to work, how you want to spend your day and unfortunately, I've got to imagine Amy, for some folks, it's probably a necessity that you can't stop working.
Amy Walls (05:03):
Absolutely. For some people it is. And a Transamerica study found that 56% of retirees plan to work in some capacity after retirement. That is more of the transition. Now, here's an interesting fact about that: studies have shown that the people who are happiest are the people who make a clean break and don't work part-time in retirement.
Jon Gay (05:26):
That is really surprising to me Amy, because I think about my folks. My mom is 70, my dad is 73, my mom is not working, my dad is working part-time in his retirement as a school crossing guard and he is a grump, with a capital G, all summer long because he's not getting out of the house and having some sense of purpose.
So, I've got to imagine the folks who are very happy not working at all are that way because there is something filling their day and giving them fulfillment that is not necessarily punching a clock, so to speak.
Amy Walls (06:00):
I think you're right. It's probably about being purpose driven and whether that's getting that purpose from work, volunteering, grandkids, it's about having a reason for what you do during the day.
Jon Gay (06:17):
So, retirement doesn't necessarily mean the end of work, just a shift in how you're spending your time.
Amy Walls (06:20):
Absolutely.
Jon Gay (06:22):
Okay. Myth number three, downsizing always saves money. People often think it's a surefire way to save money in retirement but I've got to imagine that's not always the case and you're going to tell me why.
Amy Walls (06:34):
Yeah. You are correct. That is not the case. So, imagine that your life looks a little different than it does now. You and Ellen have four kids and you have this giant house and you are thinking, “Gosh, when these kids move out, we are going to move into this two-bedroom house that's nice and small, easy to clean, maintain all of this.”
And the fourth one finally moves out as the first one's getting married and has their first child and you're thinking, “Ooh, grandkids. Oh, that two-bedroom house isn't going to be big enough for the holidays. Oh, we have all these memories in this house of our kids doing all of these first activities and now we want to be here and enjoy our grandkids getting to do some of these same things.”
Oh, maybe alternately, Jag you stay in the house a little longer thinking you're going to do this later and your health declines. And you realize, packing up all of these things is a little bit harder and a little bit more tedious, time consuming, energy consuming than what we're really up for. “Huh, I think we're going to stay put.”
So, the myth was downsizing always saves money. One, a lot of people don't end up downsizing when they say they're going to, that's the first point I want to make. But downsizing can also be expensive with real estate fees, moving costs. Often today, if you imagine you find a new home, there's probably some renovations you're going to want to do to it.
Jon Gay (08:29):
Yep. We started house hunting last weekend. That is true.
Amy Walls (08:34):
The bottom line is downsizing is not always realistic or less expensive.
Jon Gay (08:40):
Got it. Okay. Amy, our next myth involves debt. The myth is all debt should be paid off before retirement. Should people aim to be completely debt free before they retire? I'm guessing there is some gray area here.
Amy Walls (08:53):
It's a nice idea. Jag, let's pretend that you are thinking about retiring and you have some long-term debt. You can easily make the payments over time, but to pay off the debt you would need to take an extra-large distribution- perhaps from an IRA or a 401(k) that's going to add to your taxable income. That may not make sense.
It's all going to depend on your cashflow and also what the interest rate on the debt is, as well as what those payments are. So the idea, I think, behind being debt-free in retirement really comes from trying to figure out how to recreate a paycheck in retirement and it seems easiest for most people that I've talked to, to try to recreate a paycheck when the amount you need on a monthly basis is smaller.
And so, to make that math work in their heads, the debt has to go away, and it just simplifies their life. But the reality is it may not make sense to pay off that debt because like I said, if it's a low interest debt, maybe a mortgage that's from five plus years ago that might be manageable in retirement, especially when it's at a 3% interest rate and when the money that you have to pay it off is going to be taxed at a high tax rate, I don't know anybody that's paying taxes at 3%.
Jon Gay (10:33):
No, that's fair. Alright. So, Amy, something I want to follow up on with this is based on a conversation we had in a previous episode of the podcast. I understand what you're saying that in many cases it may not make sense to take money out at a higher rate to pay something off that's a smaller rate, that that would be a kind of a net loss that it's almost costing you to pay something off.
But I've got to imagine it's different for everybody. For some folks, the behavioral piece of it, the fact they just want to have this debt off their books, whether it's a mortgage, a car loan, whatever the loan may be, I've got to imagine there's a balance there for some folks where maybe it's worth taking a financial hit if it means getting this debt off their mind.
Amy Walls (11:18):
That can be true Jag. Absolutely. I think the opposite can also be true and I think we've talked about this probably in the same podcast.
For some people, maintaining that mortgage for example, may actually be beneficial behaviorally because of what having the higher cash flow needs each month causes them to do or allows them to do with their lives because they may penny pinch on the dollar amount and then not do the things they actually want to do and the domino effects. So, listeners, for all of this, you probably want to go back to an old podcast. I can't tell you which one right now.
But one of the consequences of that and sometimes when I've shared with clients, “Hey, it's actually beneficial to keep your mortgage,” is it reduces taxes not only today. Rather than making a lump sum payment but once they are of required minimum distribution age, it makes a big difference because they will have taken larger withdrawals now making that account balance smaller.
So, they save on taxes not only before required minimum distributions, but even after perhaps the mortgage is going to be paid off in those years when they would have that because we were able to spend down that account in a practical, sustainable way.
Jon Gay (12:45):
Got it. There's the numbers, there's the behavioral piece of it, there’s the tax implications, this is why I needed to talk to a trained professional before making any of these decisions.
Our final myth we're going to cover in the first part of this podcast- and you've got me teed up because I already know how this one turns out because again, I have parents in their 70s- and that is that Medicare will cover all healthcare costs. I'm going to call BS on that right now, Amy, you tell us why.
Amy Walls (13:09):
You are correct. This is a myth. There are gaps with Medicare. Medicare covers a lot, but it does not cover everything. Typically, covers about 80% of healthcare costs. But listeners, you are responsible for things like long-term care. So, if you need help, dental costs, those are big.
Jon Gay (13:34):
That was a very big one for my family. Yep.
Amy Walls (13:36):
And vision costs. To give you an idea of what these costs mean for you, imagine that you're 65-years-old and a couple retiring today, you are going to need approximately $315,000 to cover those out-of-pocket healthcare costs in retirement.
Jon Gay (13:57):
That number comes from Fidelity, and it sounds scary when you first mentioned it, but now that I think over the last couple years and in looking at my parents' finances with them, that number actually doesn't surprise me, now that I've got a little bit of experience with this piece of it.
Amy Walls (14:10):
Yep. So, it's absolutely crucial to plan for those costs to avoid surprises.
Jon Gay (14:18):
Absolutely true. And the dental and vision piece definitely surprised me when I was looking at this with my folks and they're like, “Yep, got to pay for cavities and glasses and all that.” And I'm like, “Really?”
Amy Walls (14:27):
Bridges.
Jon Gay (14:28):
Yeah. London Bridge is falling down. Trust me.
Amy Walls (14:32):
Absolutely. So, the way that you do that is making sure you understand ahead of time what Medicare covers, look at supplement plans. I've heard people say, “Ah, we don't need one of those.” It fills in a big portion of that gap and then health savings accounts can also help bridge that gap.
Jon Gay (14:51):
No, that's great advice and definitely a complicated space where, again, you're going to want to talk to a professional in that space. Alright, Amy, that is 5 of our 10 myths. We're going to cover five in our next podcast.
But in the meantime, if somebody wants to come talk to you and your team at Thimbleberry Financial regarding their financial future, how do they best find you?
Amy Walls (15:07):
They can give us a call at (503) 610-6510 or reach us online at thimbleberryfinancial.com.
[Music Playing]
Jon Gay (15:17):
Great stuff as always. We’ll talk again in a couple weeks.
Amy Walls (15:19):
Sounds good Jag. Looking forward to it.
Jon Gay (15:21):
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 FINRA/SIPC. Advisory Services through Cambridge Investment Research Advisors, Inc, a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.