Ep. 209 – What Issues Should You Consider Before You Retire?

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the issues to consider before you retire. Sometimes, you get the luxury of deciding when to retire, and sometimes you don’t, but either way, you always want to be thinking about the elements when it comes to retirement planning.

Listen in to learn the importance of understanding your cash flow needs and budget and building some type of plan for your retirement. You will also learn the importance of budgeting for health insurance if you retire earlier than age 65 and the options to consider for long-term care planning.

In this episode, find out:

●     Cash flow – understand your expenses, where money will come from, and build a plan.

●     Understand your retirement age and the implications on your payment options.

●     The importance of understanding the piece of your retirement your spouse is entitled to.

●     Consider budgeting for health insurance in your retirement if you plan to retire before age 65.

●     The math and emotion to consider when it comes to mortgage payment.

●     Put into alignment some retirement-focused vehicles as you approach retirement.

●     Tax planning – things to consider strategically to lower your tax bracket in retirement.

●     The options you need to think about when it comes to long-term care planning.

Tweetable Quotes:

●     “It’s rare that we’re ever going to take money out of an IRA or 401k to pay the house off because we have to pay taxes.”– Radon Stancil

●     “It is scary to think about long-term care, but it is the reality we need to plan for.”– Murs Tariq


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:Welcome everyone to Secure Your Retirement Podcast. Murs and I have a topic today that I think it kind of goes in waves where we’ll have folks that are going for a while, it just seems like we’re doing regular retirement planning. And then we’ll start to get this idea where companies start to offer the early retirement packages. They start to incentivize people. And I think as we went through this economic cycle that we’re in right now, we’ve heard more and more companies actually offering up these packages again. So we thought we would hit and talk about some issues that we should consider before you retire. Now, that’s if you’ve got the, I guess, luxury of making that decision before you retire. But either way, these are topics that Murs and I go through with almost every one of our clients as they’re getting ready for retirement, thinking about retirement.  
 And really just to kind of tell you some of the topics we’re going to talk about, we’re going to talk cash flow. That’s a really big topic. Healthcare and insurance. We’re going to talk about asset debts. A lot of times people want to know, should I pay the house off? We’re going to talk about that. We’re talking about a couple of tax planning issues. And then long-term care. Long-term care is a big, big topic. A lot of clients want to know, how do I deal with that? A lot of clients, a lot of potential clients even, they’re at the age where their parents are in long-term care and so they’re going, “Hey, I’m having to deal with this,” or “I just got through dealing with it” and I know it was a big financial blow. So we want to make sure that we understand all these different topics.  
 So let’s go right into the first one, Murs. This idea of cash flow. We talk about it from the perspective of income planning and we talk all these, for years you do nothing but work for a company, they pay you an income and then all of a sudden you’re going to turn all that into an income plan. So what kind of cash flow things do we talk about or consider when we’re working with a potential client?  
Murs Tariq:Yeah, I think cash flow is something that you don’t really think about until you get to that point of stopping cash flow. So when you’re working and you’ve got the paychecks coming in and you’re saving out of your paychecks and you’re paying the bills just fine. Cash flow is just, it’s perfect. Everything’s working just fine. But when we get this potential of a layoff or an early retirement or just retiring in general, our mind starts to shift in understanding where cash flow is going to come from when it’s not an employer. We want to think through quite a bit. So understanding your cash flow needs is going to be important in that sense. It’s really understanding where money’s going to come in the door from. So security, pensions, investments, what assets do we have to work with? And then also equally important is understanding our expenses.  
 So while you’re working, maybe you didn’t have a budget because everything is working just fine. As we see and work with people and help them transition into retirement, budgeting I think is very important and understanding how we’re spending money and being able to build that into some type of plan is ultimately going to say whether or not the plan works. So understanding your cash flow needs is going to be key in building this out.  
 Also, if you’re going to receive a pension or not, I feel like fewer and fewer people that come in the door in our office are going to receive a pension or already have one. So those numbers are going down. But if you do have a pension, they are very powerful tools when it comes to cashflow and income planning. So understand your pension, understand the payout option. So there’s usually a single life which is going to be the highest payout, and then you have typically, you’re going to have options under that to include a spouse or to have a period of time where income’s coming in. So understand those options and have someone to think through them with you.  
 Are you retiring early? So age is important when you’re retiring. Is it 55? Is it 62? Social Security has defined what full retirement age is. Right now, that’s around age 67 for most people. So understanding when you’re going to retire is going to have implications as far as your social security benefits, as far as your ability to withdraw. So for example, if you retire before the age of 59 and a half, you could get penalized on your IRA withdrawals. So you want to understand those rules too. With a 401k, if you retire after the age of 55, you can actually take withdrawals from your 401k and it kind of alleviates that 59 and a half rule there. So there’s some things to work with on that side of things. And so Radon, why don’t you take us through if we have a spouse, what do we need to consider there and some other things.  
Radon Stancil:The one thing I was going to hit on the Social Security too is that you got to think about is that if you are retiring before full retirement age, there is an income limit there of $21,240 currently. And then we have to think about income a little bit more or we get a little bit more room actually at full retirement age of $56,520. So you got to think about that strategically as to how you’re going to take social security and what you’re going to do there. So keep that in mind as well. One other little caveat that you might think about as well is that if you’re going to retire really early, so 55, after 55, you can take money from a 401K without a 10% penalty, whereas if it’s in an IRA, you have to wait to 59 and a half. So just a couple little things there to think about when it comes to those things.  
 Now the other issue is, or things that we have to think about is if we’re married. Now, why is that one important? Well, if you are married, and we’ve had, I don’t know, a couple of instances here recently where the person didn’t really understand how Social Security works for the spouse on either side. So the way it works is with Social Security is that if I am, let’s say one of the two of us is a higher income earner than the other. Well, that means my Social Security might be bigger than theirs. So let’s say that I have the higher social security and my spouse, maybe they didn’t work, maybe they were a homemaker and so they didn’t work at all. Well, they still get credit because they get, based on our marriage, as long as we were married for 10 years or longer, then they can get up to half of the benefit of the higher income earner.  
 Now, if they earned their own credits, they’re going to get more than the half if that’s what they did and if they earned that. But the worst case or lowest case would be them to get half of the benefit of the higher income earner. So keep that in mind. We had a client who came in and did not think their spouse was going to get anything, and so it was in their mind, “Oh my goodness, I did not realize that.” And it was a much different part of the plan. You could actually still be eligible even if you’re divorced. Now, there’s some guidelines and things that you got to think through on that one. So we’re not going to go into all those details. Just know this. If you were married for at least 10 years or longer, there could be some benefit there for you when it comes to Social Security.  
 We’re going to transition now out of cash flow and we’re going to talk a little bit about healthcare and some of the things there that need to be considered. I’m going to just start off and just say the first big thing here to consider, and we run into this all the time, is a person who’s thinking that they’re going to retire prior to 65. The reason why that’s such a big issue is because at 65 you qualify automatically for Medicare. And Medicare and a Medicare supplement policy is much less expensive than if I have to buy my own healthcare policy prior to 65. So a person who’s going to retire say at 60, 62, something like that, they have to put a lot of thought into how they’re going to bridge that two to five years, whatever that might be, that they’re going to do that. Because health insurance, and this is not a quote, but I’m just telling you what we’re running into, and we don’t sell health insurance, but it’s about anywhere from $1,000 to $1,500 a person at that age to get health coverage. And we’re not talking about very rich health coverage either. So that is something that’s got to be considered in the budget. So Murs, you have any other things here I think we can talk about in that area that just are important to remember?  
Murs Tariq:I think just like with when we’re getting our paycheck, everything works out. What we also forget is that our employers covering our healthcare. And while things work out, once you retire, it’s either are you eligible for Medicare or how are you going to get health insurance? So you’ve got the health insurance side to figure out. Also be considering dental and vision. Where am I going to get that from if I retire early before Medicare or even after Medicare? When do I get that? An HSA, health savings account, has become popular in the last say, 10 to 15 years. It does have quite a few benefits to it. So if you’re contributing to it now, don’t forget about how you can use that for medical expenses in the future. Also, once you reach the age of 65, it becomes kind of like an IRA, so it’s not limited to medical expenses. So a nice little benefit there as well.  
 Once you reach the age of Medicare, age 65, you want to really be paying attention to what your income is at that point. It’s this thing called IRMAA, I-R-M-A-A, IRMAA Surcharges. We actually did a whole podcast episode on this because it is a topic in itself and you really want to understand how it works. If you go back to episode 177, we’ve talked you through IRMAA, how it works, what are the income levels and everything like that. So I’ll leave it at that, that you want to be aware that IRMAA can, if you make enough income after the age of 65, can actually take your Medicare parts B and D and make them more expensive and nobody wants to pay more for it than they feel like they should. So be aware of that.  
 And I think, Radon, I don’t know, is there anything else to add on this section?  
Radon Stancil:I think we covered that one pretty good. I think we can transition over into asset and debt. I’m going to just start off and talk about the debt. One of the things that people ask us is, “Should I pay my house off?” Now, a lot of the folks that we work with have a majority of their money in IRA, 401k type money. And they might have some savings in the bank. They might have a brokerage account, but the vast majority is in that type of money. So I’m going to just say hands down, it’s very rare that we’re ever going to say, “Take money out of an IRA or 401K to pay the house off” because we have to pay the taxes. I’d rather us do small distributions to make maybe a little extra payment if you choose to do so on the house.  
 The other thing to consider is, what is my interest rate on the house? If I had a mortgage that maybe was from a few years ago- We actually just had a person in by the way that their mortgage is at 2.8. Well, if they got a mortgage at 2.8, I don’t have a really good rational thinking about, should I pay that off? That’s just a really low rate. Again, I always say paying the house off comes to an emotional state. So the person says, “Hey, I just want to get rid of the house payment.” Well, okay, let’s do that. Now, another way to do it is I do some easy quick math. And we’ll do it on $100,000.  
 Let’s say I got $100,000 mortgage, $100,000 left on my mortgage and my payment, just my principal and interest payment was let’s say $1,200. So now I’m making a $1,200 payment, because maybe it’s an old payment on a $100,000. So if I said, well, if I had $100,000 in the bank or in savings, how much would that generate for me? Well, maybe right now that might generate $500 or $600 a month at the best, at the best. Well then it probably makes sense to pay off the mortgage because I can take that $100,000, put off it in the mortgage and all of a sudden I get $1,200 of cash flow. If my payment though is $350, well, maybe I shouldn’t pay off the mortgage. You see what I’m saying? So we do that kind of math as well.  
 So when it comes to mortgage, some of it is math, some of it’s in motion. That’s something that we do want to look at. Now, something that we really need to consider on the asset side is our risk exposure. So Murs, could you talk a little bit about how we deal with the risk exposure?  
Murs Tariq:Yeah, and I think when you’re working and everything’s working fine, you don’t really look at risk too much. You’re kind of in that accumulation phase of life. When you transition to retirement, a lot of times we’re starting to think about how we’re going to create a withdrawal strategy that’s going to provide income for the next 30 some odd years and hopefully leave some money behind as well. And so that shift into retirement can also shift how we should be looking at our overall investment objective, how we have things set up, and really taking a look at risk. 2022 was a gut check for a lot of people I think. The markets were down, depending on which index you look at, they were down from 20 to 30%. And so that made a lot of people realize, “Hey, I can’t stomach this. I’m too close to retirement now,” so let’s reevaluate how we’re invested today inside the market, outside of the market, understanding how things are going to work.  
 I know for us, when we are getting to a point of retirement, there really are some retirement focused vehicles that are going to help reduce overall risk, still generate a return, and also be able to provide that withdrawal predictability. And so putting all of that back into alignment I think is really important. As you approach retirement and do retire, that’s going to be key to making a plan that works comfortably and lets you sleep well at night.  
Radon Stancil:So let’s transition just for a moment here and talk a minute about tax planning. Now you might think, “Well, how does this play into it?” Well, I’m going to tell you one of the biggest things that we see, one of the biggest opportunities is that if you are retiring prior to 72 and soon to be 73 when required minimum distributions are to be taken out of our IRAs and 401ks, then if we know that’s going to be a large amount of money and it’s going to push us into a higher tax bracket, we may want to do a strategic plan at retirement to do Roth conversions. Let me give you a couple of examples on this just real quick.  
 We had a client who retired, they have cash in the bank. They said, “Hey, you know what, we can actually live for the year on the cash in the bank and maybe a little bit of the brokerage account money,” which means none of that’s going to be showing up as a taxable event to them. And they had not gotten to the point of 72 yet. And so we were able to do significant amount of Roth conversions at a very low tax bracket. And so that is something that you want to consider strategically. How do I deal with the first couple or few years of retirement, especially if I’m retiring prior to 72? Like I said, soon to be 73. So keep that in mind. Because let’s say you retire at, say, 62, okay, I’ll just do some easy math. And let’s say you had a million dollars in your 401k IRA, if I grow it at 7.2%, in 10 years at my 72, I’m going to have now 2 million. And my distribution on that 2 million is roughly about 4%. So that means $80,000 of distribution, required minimum distribution has to come out of it.  
 Well, if I’ve got Social Security and other returns, all of a sudden my income goes up considerably. So that’s why that is so important. And I think that the other we hit too, as far as just the lower income tax bracket, I think we likely will be in a lower income tax bracket if we want to be strategically. So just keep that in mind. I think that’s our big topics there. The next one’s long-term care planning.  
Murs Tariq:Yeah, so long-term care, it is scary to think about it, but it is a reality that we need to plan for. And what we will do is we’ll just look at it from a numerical perspective first and say, “Hey, what if this scenario does happen?” And we make hypotheticals and say, “What is the actual cost going to be?” We know today in an assisted living or nursing home type of facility, it’s $8,000 a month. It’s very expensive if you’re in a private room. And so we extrapolate that and say, “Well, what is it going to be going forward?” And when we look at it, the ability or the idea of self-insuring, we’ll give you a number, a good guess as to what that’s going to cost. And it’s an astounding number. 5, 6, 7, $800,000 is what it’s typically going to cost for someone to be as self-insuring and long-term care for a three to four or five year stay.  
 So when you hear those numbers and we’re running through them in a meeting, now you have the ability to say, “Well, can I afford to do this? Do I even want to do this? Or do I want to transfer the risk, some or all of the risk to an insurance company?” And that’s where we have to start thinking about, “Well, what are the options?” And in our world, there’s really two types of long-term care plans. One that is very expensive, which is the traditional way of doing long-term care where you pay the premiums, and we’re seeing a lot of rate hikes in that arena. And the other is you have more of an asset based type of plan. So Radon, do you want to kind of walk them through things to think about there.  
Radon Stancil:So one of the things that we’ve gotten a lot of is rate increases. Rate increases where people bought the older traditional insurance and now they’re saying, literally we’re seeing 50, 60, 70% rate increases and it is taking their premiums to the point where they’re unaffordable. But there are asset-based type long-term care situations. One of those is, “Hey, I take $100,000, I put it into a long-term care-based annuity, and all of a sudden if I am able to qualify, I have $300,000 of benefit for long-term care.” So again, I could put $400,000 in there and have four times three, I got 1.2 million dollars of long-term care benefit. You can also do it with life insurance, and that’s a whole different way to look at it. But the reality is I can do it where I don’t have to worry about premiums.  
 By the way, if I do the annuity type scenario where it’s a hybrid, I still have access to my money. If I do the life insurance, I still have access to my money. And the other key area here is that if I don’t need the long-term care insurance, all of the money goes plus interest to my beneficiaries as a death benefit. So I’m not losing out. A lot of times in long-term care, people would say, “What if I don’t need it? And then I paid all those premiums and all the premiums are gone.” So this kind of takes that off the table, makes it way more of a scenario where it feels more friendly. So that’s the topic on that, if you have any questions. Did you have anything else Murs?  
Murs Tariq:Yeah, I’ve got one more to add is while we are working, again, we’re somewhat on autopilot. And maybe we had our wills and power of attorneys and all these things done years and years ago or maybe we never got them at all. That would be another thing to add to the list to make sure it is up-to-date, make sure beneficiary forms are on file. Too many times we hear, we get the phone call that something has happened to my wife or we didn’t have this on file, or we just don’t want to ever be in that scenario where we don’t have the estate planning the proper documents in place, which is usually going to be a will, possibly a trust power of attorneys, which are your durable and your medical power of attorneys, HIPAA authorizations, and really just an overall plan and knowing where those documents are and also and people that are going to help take care of you also for them to know where those documents are and how to get access to them. That’s going to be major when that time does arrive.  
Radon Stancil:Right now, by the way, Murs and I have a checklist that we’re working off of that we’re completely able to provide to you if you’d like it. This one is called, 2023: What Issues Should I Consider Before I Retire? It’s a great format for you just to kind of go through and so, if you’re in that window where you’re thinking about retirement, reach out to the office. You can call the office, you can email us. All that information is on our website, which is pomwealth.net. We are more than happy to provide for you the checklist here. Also, what Murs just talked to you about. We have another checklist for that. What Issues Should I Consider Before I Update my Estate Plan? We’re glad to provide that for you as well.  
 We want to give you resources, so make sure you reach out to us. We’re completely glad to do that. You can go to the website, top right-hand corner. You can click on Schedule Call. Murs and I can hop on a 15 minute, no obligation, complimentary phone call and we’ll make sure we get these checklists out. Or you can just simply call the office at (919) 787-8866. Ask for Morgan or Laura. They’ll make sure you get the checklist as well. We hope this though, at least has given you a little bit of things to think about. If you’re already retired and you’re already going through this, then you say, “Wow, I wish I’d have had that,” and you know somebody else who’s going to be getting ready for retirement, tell them about this episode, then go listen to it and get the benefit. Thank you very much. We’ll talk to you again next Monday.