Retirement Talk Podcast Episode

67. 3 Retirement Mistakes You May Be Making Right Now

August 27, 2021
 Tax Free Income for Life

We’re told that as long as we’re saving for retirement and making investments, we’ll be set—but that may not be the case. There are a few mistakes you could be making with your financial plan, and not even realizing you’ve made the mistakes.

In today’s episode, our hosts are sharing three retirement mistakes that you may be making right now. Listen in as they discuss an article from Kiplinger highlighting the mistakes you need to avoid.

Review the article mentioned in today’s show >> 

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Show Notes

Three retirement mistakes you may be making right now from (2:24)

Mistake 1. Investing Like You’re Still Working (2:54)
Accumulation Phase > Preservation & Income Phase > Retirement

Mindset Shift with Your Portfolio (3:54)

Accumulation Phase (7:17)

Selecting & Building Your Plan (10:04)

The SECURE Act & The CARES Act (11:59)

Approaching Your Retirement Income Plan with a Team (14:06)

Mistake 2. Proactively Prevent the big drop in your portfolio as you get closer to retirement. (17:18)

True Diversification (18:00)

Mistake 3: Thinking that retirement means a lower tax bracket for you. (19:42)

Asset Protection (23:35)

Long-Term Care (23:52)

Links

redefiningwealth.info

lswealthmanagement.com

Weekend Read: redefiningwealth.info/weekend-reading

Text TAX GUIDE to 474747

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JAG:

Welcome to Retirement Talk, the Redefining Wealth show specifically for pre-retirees and retirees to help you better understand and navigate and educate during these financial times. We’re here to discuss thoughts and ideas of some of today’s foremost experts in the field of finance and retirement, as well as discuss trending topics that could impact your bottom line. These discussions can help you make better financial decisions and be informed so you can live the lifestyle you imagine and make better financial choices.

JAG:

Laura Stover is a registered financial consultant and CEO of LS Wealth Management, as well as founder and owner of LS Tax, a consulting firm. She’s been featured in Forbes, CNBC, and the Wall Street Journal.

JAG:

I’m John JAG Gay. Here is your host for Retirement Talk, Laura Stover, along with certified financial planner, Michael Wallin. Welcome both to the show.

Laura:

Hello. Hello. Hello. How is everyone doing this week?

Michael:

Just marvelous.

JAG:

We’re hot but we’re good.

Laura:

It’s hot everywhere, I think here in the United States. I’ve been doing a lot of travels. I was recently in Kansas. It’s hot. I’m in Ohio. It’s hot. Going to Nashville the end of next week, and it’s hot there as well, but I’ll take it over winter ice.

Laura:

And if you’re thinking about traveling, that may be something that you have in mind for retiring. When you hit that final chapter of your retirement journey, you’re supposed to have a gold watch, retire, live comfortably. Be able to spend time with the grandchildren. Be able to travel and do the things that’s important to you. Live the lifestyle that you imagine and deserve.

Laura:

And boy, we have a fabulous show today. We are thinking about retirement and you should be too, especially if you’re 10 years in front of retiring or maybe you’re already retired. It could be around the corner for some of you listening.

Laura:

`So that’s what we want to focus on today and give you a lot to think about. The transition from working to retiring, and this indeed is an adjustment for many people. It requires a change of mindset that includes a change in investment philosophy.

JAG:

That’s right, Laura. This week’s featured article, a part of our Weekend Reading series for retirees. You can of course, sign up for free, just go to redefiningwealth.info and receive four articles each Friday.

JAG:

This article, three retirement mistakes you may be making right now from Kiplinger. The article makes a great point regarding the fact that you should not continue to invest like you’re still working when you’re near or in retirement.

JAG:

It would stand to reason that it’s about income planning. It’s about your second act, keeping your nest egg, not Bitcoin, not Robinhood or making a killing with hyper-growth stocks. If you want to have tax planning strategies, you want to work with a planner that understands this phase, and we’re going to cover three key areas today surrounding that.

Michael:

JAG, that’s right. And let’s talk and elaborate on the first big mistake that many people make as they approach retirement. And that’s really investing like they’re still working, and that’s a big mistake because many people are better served if they start transitioning and designing their investment portfolio allocations a couple of years ahead.

Michael:

And I like to look at seven years ahead of retirement to prepare for the preservation and income phase of life. So we start out in the accumulation phase. We spend that 25, 35, some 45 years of accumulating. And then we make that transition into retirement, we look at moving into the preservation and income phase, and that’s where we really focus on an income plan with preservation of capital, and looking at building an income plan from the assets that we have accumulated over the accumulation phase.

Laura:

And as you approach retirement, I think you need to not just have your portfolio in alignment, but that mindset about your portfolio has to literally change. We have to shift from focusing all on accumulating assets, saving, accumulating dollar cost, averaging, thinking about that number that we need to be comfortable in retirement.

Laura:

And the mindset shift is truly a mistake I see a lot of people, I would say probably at least 85% of clients when they start with us, they’re still in that focus of investing like they were still saving and accumulating.

Laura:

And up to this point, maybe you’ve been more aggressive. Maybe you’ve been accustomed and willing to take a more calculated risk, and that certainly helps you grow your money. But that approach may have become very deeply ingrained in you, making it a habit and habits, as we know, are hard to kick.

Laura:

Maybe you had an employer plan and they’re matching dollars that you put in, therefore your dollar cost averaging over the course of a very long time. We know that’s an effective strategy when you’re accumulating and working on growing and compounding wealth.

Laura:

But when you retire, that weekly paycheck ends. It’s about cash flow planning, budget analysis. And if you’re one that, for example, maybe you’ve picked your own stocks, and this is one of the things I see the do it yourself investors make some grave miscalculations at. They may do a great job monitoring their stocks, picking the right stock allocation.

Laura:

But when you begin withdrawing money from your investments to live on, you have to have a written income plan. Imagine the results if we had a recession or the market takes a plunge, then suddenly your account balance is suffering in a new way.

Laura:

And when you’re taking distributions from your capital, yes, the market may come back, but that can gravely, we’ve seen the numbers over and over, Michael. Those first couple of years of the market is in a decline and you’re taking money out of the portfolio. We know that has a negative impact, regardless of how much you’ve accumulated in assets.

Laura:

So understanding that your account could have a double blow, essentially, if that were to happen. If you had a bad market combined with a withdrawal rate, it can totally drain your savings very quickly. And if you haven’t retired yet, there’s still time to really address and fix these problems by, well, I guess, you could always save a little more, work a little longer.

Laura:

But once you retire, your options really start to thin out. So again, that shift from saving, all about saving for retirement accumulation, to spending in retirement and the income planning of those assets, the distribution of income requires judicious preparation and a fundamental change in mindset.

JAG:

Laura, during that first accumulation phase, people are often focused on building that retirement nest egg, and it’s not always easy. The obvious goal you want to maximize both your saving and your investment returns, and the measure of success is the value of your savings account in your portfolio.

Michael:

And JAG, let’s unpack that a little bit more as we talk about accumulation phase. For many people, they kind of get lulled into this belief that investing is easy because they either have a 401(k), a 403(b), a 457. They’ve got a structure that their employer has set up for them.

Michael:

And what they’ve done is they just systematically put money aside, and as long as you are getting a systematic contribution going into the plan, dollar cost averaging comes into play. But also average rate of return works in your favor because you’re not dependent upon those assets. So you get that triple compounding effect as it is able to grow.

Michael:

However, once you move into the preservation and income phase and you start becoming dependent upon that distribution out of that investment account, average rate of return is gone. As Laura mentioned a moment ago, sequence of returns is critical to an individual at that time because we run assessments every single day, showing clients that had they retired in 1999 versus retiring in 2001. One retired at the beginning of a bear market, and the other person retires at the end of a bear market.

Michael:

The sequence of returns is huge to see the difference between what type of assets they have and how they’re able to distribute income off of it. And Laura has mentioned many times, we follow a lot of the research that Wade Pfau puts out, and the safe money withdrawal rates that we see out there today is a little bit less than 3% today.

Michael:

So if you look at what you’ve been able to save, and you say, now how much money can I successfully and safely distribute every year off my accounts, it’s typically around 3%. So the preservation and income phase is way more complex than the accumulation phase.

Michael:

Because here we’ve got our assets that are in the stock market and you need to be able to determine where should you put those assets? Should you treat all of your money exactly the same, or should you tranche that money into different streams for investing, as well as when dependency of income is going to come off?

Michael:

And then what type of withdrawal rate are you going to be required to take off of those, to meet your income needs? So, a lot of it is looking at that income plan, knowing the investment, and then also tax consideration. Where is that money going to be and what are going to be the tax consequences? Because the more taxes that comes out, the greater the amount of rate of return that you’re going to be required during this preservation and income phase.

Laura:

Well, that’s a fabulous point. And I think in keeping with this mistake that so many make, not shifting the mindset and when you do it yourself. Now, I think there’s for those that have time on their hands, more kudos to them. If you really are paying attention and you’re working on accumulating and building wealth, and you have a long time horizon.

Laura:

But there are so many facets to having the right type of plan, I don’t believe the average person really even knows what a plan should look like. They think, oh, I have a plan. A Monte Carlo simulation from your broker is not a plan. Just having a product with nice features is not a plan.

Laura:

I mean, how many consumers, Michael, know the difference between an index and an ETF? How many advisors know the difference between an index and an ETF? There’s a big difference.

Laura:

I heard this question just last week at my meeting in Kansas. Fabulous meeting. Advisors talk a lot these days about tax planning. Well, what does that look like? Do you know how to save on tax when it comes to the sale of real estate? Or create a tax deduction? We know this is going to be come more and more important, potentially.

Laura:

We have a lot of issues going on right now. I don’t know if the tax reform is going to happen in the way that was put out there. I’m hoping some of these things keep everything busy for a while and kind of side cart some of that. But I believe we all concurred from previous shows, tax rates are going to go up.

Laura:

The mistake I’m adding to the three mistakes we’re discussing today is I believe people miss opportunity because they are not knowing the different alternatives that’s available. Some of the charitable remainder trusts, how to take a tax deduction, how to create some tax advantage. Now that doesn’t work for everybody, and it involves specialty and specialized planning.

Laura:

The SECURE Act, the CARES Act created many, many opportunities and a lot of tax changes. And once upon a time, estate planners could offer clients a great gift, which was that life expectancy payout when it comes to the stretch IRA for client’s retirement plan beneficiaries. What appeared to be, what we call kind of an ugly duckling. It is a tax challenge asset if you have a large IRA account. You could essentially turn it into a swan, a beautiful lifelong tax deferred payout for the client’s children or grandchildren.

Laura:

Then what happened? December 2019, the SECURE Act came along. It essentially killed the stretch IRA, replacing it with that strict 10 year maximum payout for most beneficiaries. No more thrilling the client with a chart projecting a 50 year annualized increasing payout to the offspring. And the estate planner’s new job is really damage control.

Laura:

And at best we’re playing the corners, looking for anything that will help whittle some of the projected higher taxes that ugly duckling will because everyone’s so tax heavy with qualified accounts, and the SECURE Act really changed things as we know.

Laura:

And the point being, if you’re a do it yourself investor, you do not have the training or the skill to navigate through implementing strategies. Like I mentioned, like a CRT, a charitable remainder trust. There’s a number of different ways to address this and bypass that situation with the 10 year rule.

Laura:

But again, it requires working with that team. And I hear you talking about that a lot with our clients, Michael, the team approach. We spoke with a client this morning. We have our qualified CPA. We have our certified financial planner. We have the investment advisor. We utilize the team approach to address some of… There’s been a lot of law changes when it comes to the financial industry here, just in the last 12 to 24 months.

Michael:

That approach I have found that is probably the most effective. When you’re able to sit down with a team, think about it. If you were putting together a jigsaw puzzle and you sit down just one at a time and you’re trying to find all the pieces. And you’re trying to put those pieces together to even resemble what the picture on the front of the box looks like. That can be a very daunting task.

Michael:

But when you’re able to bring a team approach and you’ve got four or five sets of eyes, and everybody is analyzing, looking at it from a different approach, it effectively creates a plan that is not just one dimensional, but multi-dimensional in its approach for success.

Michael:

And when we start there looking at the tax changes. The stock market also, Laura, has been very risky and expensive over the years. As you’re approaching retirement, you’ll want to lower your risk. Many people are coming out of that accumulation phase, going into the preservation and the income phase.

Michael:

And again, I like to look at the seven year window before retirement and the seven year window after retirement, because those are the two biggest changing areas. You should change your approach in investing as you’re going into retirement.

Michael:

Because if you, all of a sudden, you had a large downdraft in the market, i.e. 1999, 2000, 2001 that we experienced, that was a long sideways market. That can reduce down your actual amount you’re going to be having in retirement to be dependent upon, and you’ve not given yourself a window for recovery.

Michael:

So if you give yourself seven years prior to that retirement date, as you mentioned, that proverbial day of getting the gold watch. Change your philosophy on investing. And now you’re moving into retirement, which for many people, it takes that three years to seven years to get out of the vacation mode. And so you don’t want to treat every day like your own vacation in retirement from a spending standpoint.

Michael:

So you got to be very mindful of the way that you are generating and how much exposure of risk that you’re putting on those assets at that time. So you want to approach that. You want to approach your tax strategy and really look at, as we talked about on our previous episode, creating the tax deferred bucket, looking at your tax-free bucket, because those are going to be important as you diversify your tax strategy.

Michael:

And if you’re still working, you’ve got your taxable bucket, but really it’s, can you get that tax deferred? And then can you ultimately move to the tax-free bucket? Because you’re going to lose a lot of your credits that go against your taxable income as you move into retirement. So you want to make sure that you’re diversifying that and you don’t run up too much taxable income that affects your social security, as well as affecting other means tested benefits that you may have.

Michael:

And so those are really important areas that we look at, and that’s really unbuckling what we were looking at for our mistake number one, and really mistake number two is failing to proactively prevent the big drop in your portfolio as you get closer to retirement.

Laura:

Well, once you’ve made that psychological adjustment about how you’re going to approach investing, it’s time to take some specific actions and be proactive now. Don’t wait until you’re in retirement and the market drops, then you’re scrambling at that point. It’s quite essentially too late. So again, the retirement red zone, as you indicated, the seven to 10 years prior to retiring.

Laura:

And if you’re about five years out from retirement, it’s an opportune time to shift more of your money into more stable assets. And this is where we get into the discussion, what is true diversification? What does that mean? A lot of people confuse the word diversification with asset allocation.

Laura:

Diversification is how your portfolio is divided, generating income, and then segmenting out the growth component of the portfolio versus asset allocation, which is like value, large cap, small cap. So don’t eliminate the stock exposure completely, but you always want to plan around income. And that is the key, cashflow is the key.

Laura:

And even though growth has dropped further down in your priority list, you want room for some growth that stocks and growth provides, and we employ tactical management and strategy diversification to make sure we’re preserving and compounding dollars when that market volatility does in fact occur. You just don’t want to be in a position where a big market drop derails your entire retirement plan.

JAG:

If you’re enjoying the show with Laura Stover and Michael Wallin and would like a complimentary copy of our newest tax guide, just text tax guide to 474747. That’s tax guide to 474747.

JAG:

You can also schedule a one-on-one strategy session, speak with Laura and Michael personally. Go to redefiningwealth.info, click schedule review. You’ll receive a walkthrough of the Redefining Wealth process virtually by phone or in-person.

JAG:

You can also take advantage of the Weekend Read. If you subscribe to the Weekend Read, you’ll receive four articles that’ll come straight to your inbox each Friday.

JAG:

Now back to Retirement Talk, the Redefining Wealth show with Laura Stover and Michael Wallin.

JAG:

As we come back from our break, Laura and Michael, the third big mistake we’re talking about today is thinking that retirement means a lower tax bracket for you.

Laura:

It doesn’t mean a lower tax bracket for me, JAG? I’m getting a lower tax bracket. What about you?

JAG:

Well, you’ve got a little bit more expertise than the average investor, I’m guessing.

Laura:

Hey, everyone can benefit from this and with proper planning, that indeed is what it is all about. Now, people often anticipate and it’s natural.

Laura:

I remember over 20 plus years ago, coming into this industry, they say you only going to need 75% or 80% of your working income, and you’ll be in a lower tax bracket once you’re retired. Both of that’s bologna. Why do I want less income? Who came up with that rule? Why would I not want more income? I want to do things when I retire. I don’t want to go to the nursing home and sit there and wait for the end. I just don’t know who came up with these notions. They’re myths. They’re crazy. If you want to do that, fine.

Laura:

But if you want a better way, that’s why you’re listening to the show because people often anticipate the retirement that they’re going to neatly drop into that lower tax bracket and the IRS will claim less of their money. Well, sadly, it’s not so, and most people have saved through these tax deferred accounts, a 401(k).

Laura:

But if your money is in a 401(k), like most people you’d prefer to have more income in retirement than you do now. You are never going to be, I repeat, you are never going to be in a lower tax bracket most of the time. You’ll be in the same tax bracket, or possibly more than likely for a lot of people, a higher one.

Laura:

Yet the conventional wisdom is to keep adding money to these tax deferred accounts, even though Uncle Sam looms as the piper who needs to be paid at some point. You do not own that entire retirement account.

Laura:

I do live presentations and people say, do you think in 10 or 20 years, taxes will be lower or higher? The consensus everyone is saying, they’re predicting that they’re going to be higher. Many are choosing to defer paying tax now to a later date, and that’s making a vulnerable situation because taxes are likely to be higher.

Laura:

Now, the good time I believe to start moving money into that tax-free bucket, whether it’s a Roth IRA or index universal life insurance, you pay taxes as you make the conversion, but those taxes are likely to be less than you’ll pay if you defer them. And you can get a guide that we have available, as far as your guide to Roth conversions. Just go to redefiningwealth.info. Make contact with us. We can make this available to you.

Laura:

Many people think they have a retirement plan by virtue of just saving money, but a portfolio, folks, is not a plan. And if you don’t proactively take control of where you are headed and what you need to do to get there, you can end up making, unfortunately, many mistakes that can cause great damage to your retirement.

Laura:

Some people manage fine on their own, but if you do not feel confident about your ability to avoid the potential perils of the retirement red zone, that’s the timeframe right before retiring, typically that five to 10 years before or during retirement. Check with a financial professional for guidance. The sooner you do, the better the odds are that retirement will be what you always hoped it would be.

Michael:

Laura, the final piece that I think we should share with the listeners today is really a bonus mistake, if there’s such a thing as that. But a bonus golden nugget to share about as you go into retirement, and that is asset protection.

Michael:

Many times people have always approached asset protection with either a will or a trust. And they think about it is using a legal document that is going to safeguard those assets, but there’s another way of asset protection. And it’s really like putting insurance around your portfolio.

Michael:

Several weeks ago, we talked about long term care, and what is long term care? Individuals, we all are living longer. We start losing our mobility. We start losing functionality of our ability to take care of ourselves. And we really need somebody to either step in.

Michael:

So, long term care if we talk about it in its full completeness, it could be an individual coming into your home to provide just some daily activities that you need some assistance with. It could be an individual going to an adult daycare. It could be an individual going over to a structured convalescent home where they are actual… Or assisted living before even getting to the convalescent care facility.

Michael:

But it’s getting care from professionals to meet those needs of what has deteriorated out of our own abilities. And the way that we pay for those many times in retirement is that we take that investment asset that we have, and we start paying down dollar for dollar, for what those costs are. And many times Laura, as you know, that runs anywhere between $3,500 and $4,500 and in some areas, even up to $6,000 a month.

Laura:

Our area is $8,000 a month.

Michael:

Oh my goodness. Think about that. That’s $100,000 a year coming out of a person’s retirement plan. Now, how do you protect against that? Well, it’s long term care, and you’re going to do that one to two ways.

Michael:

Either, you’re going to go out and you’re going to buy a traditional long term care plan that is very structured around those type of convalescent care. You’ve got a waiting period and then once you exceed that waiting period time, the insurance policy starts kicking in to pay for those benefits for you.

Michael:

Or you go out and you look at the new type of plan, which is a hybrid plan, which allows you to diversify a portion of your investment plan that you have in place today. So think of it as pennies on the dollar into this asset protection that is going to give you the protection in the future.

Michael:

And it’s actually going to pay out two ways. If you live too long and you lose those functionalities, it’s going to pay out in the benefit of long term care, a living benefit to pay for those type of cares that you are receiving from an individual or a facility.

Michael:

Or in the event, you die too soon, it’s going to pay out in the form of a life insurance policy, tax-free to your beneficiaries. I like to call it a Swiss army knife because it’s not the one-dimensional approach. My grandfather used to buy me Barlow pocket knives, and they were one blade knives. You could only do one thing with them. The Swiss army knife had the ability to have three to four to five different blades on it. As well as a toothpick, if you needed it.

Michael:

But it was… That Swiss army knife gave you everything you needed. And so for many people that are listening to the show today, as they go into this retirement, it’s not just looking at having that investment account and structuring that income plan off of it. But it’s also putting that bubble wrap or life preserver around that investment account so that you protect it in the event that your health deteriorates and you need additional care during retirement.

Laura:

And Morningstar and many companies have done a number of studies. 70% of us are going to need some type of long term care.

JAG:

Visit redefiningwealth.info and schedule a Redefining Wealth strategy review. Receive a step-by-step walk through to get you a 0% tax bracket. Go to redefiningwealth.info and click schedule review. Redefining Wealth is a registered trademark of LS Wealth Management.

JAG:

Investing involves risk, including the potential loss of principal. Any references to protection, safety, or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the issuing carrier.

JAG:

This show is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual situation.

JAG:

LS Wealth Management LLC has not put to offer and no statement made during this show shall constitute tax or legal advice. The firm is not affiliated with or endorsed by the US government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by LS Wealth Management LLC.

JAG:

Investment advisory services offered through optimized advisory services and SEC registered investment advisor. LS Wealth Management is a separate entity.

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