May 8, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for May 8, 2023

This Week’s Podcast -What Issues Should You Consider Before You Retire?

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.


This Week’s Blog – What Issues Should You Consider Before You Retire?

Are you considering retiring? After working your entire life, you’ve come to this beautiful ending where you’ve hit all your milestones to secure your retirement and can pursue the things that you truly love to do. Many companies offer early retirement options to their employees, it’s an important time to consider a few things before retirement.

What Issues Should You Consider Before You Retire?

Are you considering retiring? After working your entire life, you’ve come to this beautiful ending where you’ve hit all your milestones to secure your retirement and can pursue the things that you truly love to do.

Many companies offer early retirement options to their employees, it’s an important time to consider a few things before retirement.

In our most recent podcast, we go through all the things we think you should consider before retirement. Even if you’ve spent decades on retirement planning, these are things that you need to sit down and think about before transitioning into retirement.

Want a sneak peek at what we’ll be talking about?

  • Cash flow
  • Healthcare
  • Assets and debts
  • Tax planning issues
  • Long-term care

If you’re not considering all these points already, you need to go through them for yourself to better understand each one.

5 Issues to Consider Before Retirement

1. Cash Flow

Cash flow from your own financial perspective will change a lot when you retire. You’ve spent a lifetime working, receiving a check, and enjoying steady cash flow as a result. When you close out your life chapter of working, your cash flow will change.

Instead of cash being given to you for the hours you put in every week, you’ll take money out of the retirement accounts you’ve built up.

You’ll need to consider:

  • Your cash flow needs.
  • Where will the money come from- Social Security, pensions (we’re seeing far fewer of these), retirement accounts, etc.

Often, many of our clients have income from their careers, but do not have a strict budget in place. You need to spend time learning what your true cash flow needs are every month so that you can determine whether retirement is even a possibility.

If you’re lucky enough to have a pension, be sure to know your options:

  • Single life is often the highest payout
  • Spouse benefits

Are you retiring early? Social Security defines retirement as around 67, but there are benefit implications to retiring “early”. If you retire before 59.5, you are penalized on your IRA withdrawals. There are a lot of things to work through to understand what retiring early truly means.

For example, if you retire early, there is an income limit for Social Security that you need to consider. The limit is $21,240 (currently). If you hit full retirement age, the income limit is bumped up to $56,520.

Keep in mind:

  • Retiring before 55 comes with an IRA penalty
  • Retiring at 55 with a 401(k) doesn’t have a penalty

If you’re married, you also need to consider what that means for you and your spouse. You want to consider that one spouse likely has a higher income than the other. If you have a higher Social Security amount, your spouse will get credit if you’re married for 10 years or longer. The spouse, if they never worked, can receive up to 50% of the Social Security benefits that you have. However, if the person did work and their own benefits were higher, then they will receive the benefits they earned.

We recently had a client who didn’t know this and was shocked when they found out that their spouse would also get benefits. Even if you are now divorced but had been married to your ex-spouse for at least 10 years, there may be some benefit there for you in Social Security.

Healthcare is the next big point to consider.

2. Healthcare 

At 65, you qualify automatically for Medicare. Retiring before this age means that you must put a lot of thought into your healthcare because healthcare is very expensive. Medicare will save you a ton of money, but you need to bridge the few years between retirement and Medicare.

We’re seeing costs from $1,000 to $1,500 for people at 62 or so to get private health coverage. That figure is for a single individual and not a couple.

Employers cover your healthcare while you’re working, but when you retire, you’ll need to consider:

  • Dental
  • Vision
  • Healthcare

If you are contributing to an HSA, you will want to think about using this account, too. At age 65, you still need to take IRMAA into account, which is a Medicare surcharge for someone making over a certain threshold. We have a whole episode on this very topic, which you can listen to here or read here

3. Asset and debts 

Many of our clients have the majority of their money in an IRA or 401(k). One of the first things we are asked is, “Should I pay off my house?” If you need to take the funds from a 401(k), the answer is likely going to be: no. You need to pay taxes on your 401(k) withdrawals, and paying off your home can have a significant impact on the money you’ve saved. Instead, small distributions to make an extra payment often work better.

Low mortgage rates, such as 2.8 percent, can often be left because you may make more money with the cash in a brokerage account.

Let’s say that you have $100,000 left on your mortgage and your principal and interest payment is $1,200. If you had this $100,000 in a savings account, it might only net you $600 a month. In this scenario, paying off the house is a wise choice.

Bump your mortgage balance to $300,000, and it may not be beneficial to pay off your mortgage.

Beyond mortgage, you also need to consider risk exposure.

Transitioning to retirement means that you need income for 30-something years from the asset accounts that you have. When you retire, you want to have as little risk exposure as you can with your assets because you don’t want to experience a situation like we did in 2020 when some indexes fell 20% – 30%.

Reevaluating your investments and how you’re invested in the market will help you to limit your risk exposure.

4. Tax planning issues 

If you retire prior to 72 or 73, tax planning can save you a lot of money. 

Imagine retiring at 62 and you have $1 million in assets in your IRA growing at a little over 7% per year. By the time you’re 72, you’ll have $2 million and need to take a required minimum distribution of $80,000 or so per year. If you have Social Security and a pension, these distributions can push you into a higher tax bracket.

We can take a strategic approach to retirement by looking at a Roth conversion. We had a client who retired, had cash in the bank and lived on these funds to allow for significant Roth conversions at a low tax bracket.

5. Long-term care

The least fun part of retirement planning is long-term care planning. You never want to think about yourself in a long-term care situation, but it’s a reality that all of us are at risk of being in at some point.

And long-term care is not cheap.

You need to have a scenario in place where you are prepared to pay for this care. We’re seeing a lot of people pay $8,000 a month for long-term care, with durations being 4 or 5 years. This form of care can cost you $400,000 to $500,000 in total.

Can you afford to take on this financial burden?

You can pay insurance premiums out of pocket, or you can go with an asset-based plan. We’re seeing premiums soaring 50% to 70%, causing many people to be unable to pay for their long-term care.

Instead, you can put $100,000 in a long-term care annuity that grows to $300,000 and can be used for your long-term care. You still have access to this money if you need it and can also name beneficiaries on the account. A beneficiary will receive the total of the account if you pass and never use it, or they may receive any unused funds in the account.

If you pay insurance premiums on long-term care insurance, you will not receive any of these funds back. An annuity can be a great option because if you don’t need to use the funds in the account, they aren’t just going to an insurance company.

We also recommend that you have a will in place or review your will and beneficiaries on all accounts before you retire. If you don’t have all of your estate planning documents in place, you are putting a major burden on your family. You want to go as far as confirming all your beneficiaries and loved ones know the types of documents you have and where these documents are just in case you are ever unable to show them.

P.S. We are working off our own internal checklist titled “2023: What issues should I consider before I retire?” Call the office or email us if you would like a copy of this checklist. We also have a checklist for anyone who is updating their estate plan so that you don’t miss any key points along the way.

Click here to schedule a 15-minute call with us to discuss the things to consider before retirement.