Introduction

Madison: Hello everyone and welcome to Not Just Numbers Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora and I am here with Mike Garry. Mike is a financial advisor and a CFP and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer and his law firm is Yardley Estate Planning. Hey Mike.

Mike: Hey Maddie. How are you today?

Madison: I’m good, I’m good, how are you?

Mike: Good. Beautiful day today.

Common Sources of Retirement Income

Madison: Yeah, great. So Mike, as a financial advisor I would guess you get questions about retirement pretty frequently.

Mike: They are the most questions I get.

Madison: Okay, so over the next five episodes, Mike and I are going to help guide you through the intricate landscape of pre-retiree education, providing you with the essential knowledge and insight you need to navigate this pivotal phase of life with confidence. From understanding your retirement income sources to mastering investment strategies and preparing for healthcare expenses. Each episode will dive into a crucial aspect of pre-retirement planning. Whether retirement is on the horizon or still a distant dream, join us as we arm you with the tools and information necessary to make informed decisions and build foundation for fulfilling your retirement. All right. So for the first series, we are going to discuss retirement income and planning for the future. So, Mike, my first question is, what are some common sources of retirement income?

Mike: Sure, Maddie. Common sources of retirement income include Social Security, pensions, retirement savings like your 401k, your IRAs and investments.

Longevity in Retirement Planning

Madison: Okay, so why is it important to consider longevity when planning for retirement income?

Mike: Sure. So longevity is crucial to consider because people are living longer in retirement. You know, it’s not uncommon now for people to have a 30 or 40 year retirement time horizon. You know, two generations ago, that would have been inconceivable. Now people have to plan for it. Right. And if that’s the case, then your money, your retirement savings needs to last longer. So it’s important to ensure your income can sustain you throughout those retirement years.

Impact of Inflation

Madison: So how does inflation affect retirement income planning?

Mike: Well, inflation erodes the purchasing power of money over time. So it’s important to account for inflation in your retirement income plan to maintain your standard of living throughout retirement. As I just said, if your retirement might last 30 or 40 years, even at 2%, even if inflation is only 2%, the value of your money would get cut in half in 36 years. So if you retire at 60 and live to 96 and you have a pension that’s not adjusted for inflation, its value at 96 will be worth half of what it was when you retired at 60. And, you know, so that’s a real big deal. You know, we had 15 years where we didn’t have much inflation. We have it again. Right. So it really is important. It’s a great question, Maddie. Thanks for asking it.

Healthcare Expenses in Retirement

Madison: Yeah. So what should retirees consider when planning for healthcare expenses in retirement?

Mike: Sure. So retirees need to consider, like, the potential cost of health care, which is going to be a lot, includes insurance premiums, deductibles, out of pocket expenses, and maybe long term care needs should be factored into the plan as well. And then for a lot of our clients who have higher earnings, they face the dreaded IRMAA premiums. So they have to pay more for Medicare because their income is high and it’s something you have to plan for. And if possible, plan around. So before you start Medicare or while you’re in it, you need a plan to try to reduce your taxable income.

Sequence of Investment Returns

Madison: How does the sequence of investment returns impact retirement income?

Mike: So the sequence of returns is crucial, and that’s like, one of the biggest risks going into retirement. Because poor investment returns early in retirement can significantly reduce the overall value of a retirement portfolio. You know, planning for this is essential to avoid running out of money prematurely. That’s one of the reasons why the safe withdrawal rate is relatively low, because if you retire in the first year, two, three years of retirement, they have really bad returns in the stock and maybe bond markets, and the value of your retirement portfolio goes down substantially. That’s one of the biggest risks that’s hard to account for and that people don’t think about. They think of having retirement down years as a one off. But if they happen to you, you know, the year you retire or the year right after you retire, it can make a huge difference. So you need to plan for it.

Retirement Income Optimization

Madison: Okay, so what strategies can retirees use to optimize their retirement income?

Mike: Sure. So retirees, you need to optimize their income. They need to diversify their investments. They need to create a safe withdrawal strategy. Might want to consider annuities, and they need to adjust their spending based on market conditions and their financial situation. You know, you need to develop a plan.

Social Security Benefits

Madison: Okay. How should individuals incorporate Social Security benefits into their retirement income plan?

Mike: So Social Security benefits are a significant part of retirement income for almost all the couples that we see. And so individuals should decide when to start claiming benefits to maximize their payments and their overall retirement income. Generally, that means collecting it later and not right away, but it’s a big part of the plan. When you’re figuring out what your income is going to be when you take Social Security is a huge part of it, and it’s something, again, you need to plan for.

Safe Withdrawal Rate

Madison: Yep. What is a safe withdrawal rate, and why is it important in retirement planning?

Mike: Sure. A safe withdrawal rate is the percentage of your retirement savings that you can withdraw annually without running out of money prematurely. It’s crucial to determine this rate to sustain your lifestyle throughout retirement. So, you know, if your safe withdrawal rate at your age is 5% and you take out 9%, well, maybe you’re going to run out of money when you’re 78 and no one’s going to hire you. Sometimes people think of the safe withdrawal rate going back to the Bill Bengen’s paper from 1994 as being four or four and a half percent based on certain ages. But really, it’s a good starting point or a rule of thumb, but everybody has one that’s different depending on when they retire, what they have, how much they need to take out. And it’s a good idea to figure out what it is before you start taking money out.

Madison: Yeah. So how do you figure out that safe withdrawal rate?

Mike: Well, we use financial planning software, and it incorporates people’s ages, their life expectancy, the balance of their portfolio, how aggressively or conservatively it is invested, and how much of their income needs need to be met by that portfolio. And so all that goes in. They run a Monte Carlo simulation, and we come up with an idea of how much someone could take out safely. And of course, it’s not just, like, one specific number, but it’s only a continuum or a range. So maybe someone could take out 5% is really pretty safe, and 6% is okay, and 4% is really safe. So really what it comes down to, maybe, is how risky is the client or what are their needs? It’s not really just one number for everybody, but, yeah, a lot goes into it.

Asset Allocation Impact

Madison: Oh, yeah. So how does asset allocation impact the sustainability of retirement income?

Mike: Yeah. Asset allocation includes diversifying investments across different asset classes. And proper asset allocation can help manage risk and provide a balanced approach to generating retirement income. One thing, it goes back to your previous question about sequence of returns risk. So, if you retire and you have all of your money in the stock market, and the stock market in the US goes down by 50%, which it has twice in the last 25 years, that’s a bad thing. Your sequence of returns risk is going to go through the roof. So you need to have a diversified portfolio of stocks and bonds and some cash. And then even within stocks and bonds, it makes a lot of sense to diversify among those, not just US large cap stocks like the S&P 500. You also need small cap, you need value stocks, you need international. It probably makes sense to have emerging markets for people. And then you have different kinds of bonds. But the bonds, again, should be investment grade and shorter, intermediate term, not long term and not junk bonds.

Tax-Related Factors

Madison: All right, so what tax related factors should retirees consider when planning their retirement income?

Mike: There are a lot of them, and they drive a lot of the decision making process. Right. So you need to consider the tax implications of your various income sources, such as Social Security benefits. So Social Security benefits can be taxable, depending on your income. And so up to 85% of someone’s Social Security benefit could be subject to a federal income tax. That doesn’t mean you lose 85% to tax. That means if your benefit is a 1,000, 850 would be considered taxable income. And if your benefit is 1000, your income for Social Security will probably be taxed less than that. Withdrawals from retirement accounts. Some people have, majority of people have most of their money in pre tax accounts. So it’s all taxable when they come out, but some people have made post tax contributions and now people have Roths in their 401ks and in their regular Roth IRA. And so you also have investments that are in taxable accounts and they’re taxed differently. So you really need to look at your overall mix to minimize your lifetime taxes that you’ll be paying. And it’s not terribly complicated, but it takes some thought and some planning. And that’s the thing. I think we’ve touched on this on an episode a couple podcasts ago, where people and a lot of times their accountants just look at minimizing their taxes in one specific year without thinking about moves they can make that’s going to lower their taxes for the rest of their lives. And so, yeah, just like all these other things, you need to plan in advance.

Conclusion

Madison: All right, thank you, everyone, for joining us for the first part of our series. Join us for our next episode, where we will discuss turning Social Security into successful retirement plan. For more information on Yardley Wealth Management or Yardley Estate Planning, you could visit our website at yardleywealth.net, and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.