Approaching retirement is both exciting and nerve-wracking.

After helping hundreds of families cross the finish line, we are going to discuss 3 areas to focus on and as a bonus, walk through a quick case study of a retired couple.

10 Years Out From Retirement

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Resources:

• Genworth Cost of Care Tool 

Full transcript:

SPEAKERS

Alex Okugawa & Anthony Saffer

Anthony Saffer 0:00
Approaching retirement can be exciting and nerve-racking. We’ve helped hundreds of families navigate this transition successfully. And today we’re going to focus on three areas to help you prepare. And we’ll walk through a case study of a couple preparing for retirement. Hey there, it’s Anthony and Alex from One Degree Advisors. And if you’re new here, we are Certified Financial Planners, we help folks with all things retirement, tax, and investment. So Alex, let’s dig in. If folks are, let’s say, 10 years out from retirement, they’re getting ready to prepare. Today, we want to focus on three things that will help people get to that transition time. And we are going to walk through a case study of a couple that’s preparing for retirement lives here in San Diego. So tip number one is to supercharge your savings.

Alex Okugawa 0:46
10 years out, you really want to start thinking about making sure you have enough adequate cash reserves to prepare for that transition, retirement is a big transition. And what you don’t want to do is in those early years of retirement, over withdraw from your portfolio, things may come up in those early years where if you have an extra bit of a cash buffer and a cash cushion, it can give you a sense of relief, give you more confidence that yeah, through this transition.

Anthony Saffer 1:13
It can definitely help with that flexibility as well.

Alex Okugawa 1:17
The second thing here is really like supercharging, your retirement contributions, right? pumping away money as quickly and as much as you can. And to say, your 401k can not only help you with, but also let’s say your taxes, as long as you’re making pre-tax contributions in your 401k. To be honest, for a lot of people, this is when they need those tax savings, and their highest earning years right before retirement. But it can also help you put as much money as way as you can, in preparation to build up that nest egg for retirement, there is one additional thing folks should be aware of this rule, or this strategy is still available to folks as long as their 401 K plan will allow it. And it’s called a mega backdoor Roth contribution strategy. It’s a special way to pump extra dollars into a tax-qualified account. And again, that money could be used as a tax-free pool of income in retirement. So that’s another great tool people should look at.

Anthony Saffer 2:16
Yeah, tax-free income, is always, always a good thing number focus on. Number two is to ruthlessly eliminate debt.

Alex Okugawa 2:22
No consumer debt, no credit cards, try to avoid car loans, try to avoid having any student loans. These are things where if you’re carrying debt into retirement, it can just add an additional layer of stress. There is more expenses that you need to prepare for. The second thing here, and I know it can be hard for a lot of people. But hey, if you can try and do it, it’s great is trying to have that house paid off. Our most confident clients go into retirement debt free. And again, I know it’s not possible for everyone. But if you can do it, it is something worth considering

Anthony Saffer 2:58
The question will come up in today’s interest rate environment where it rates have gone up quite a bit, I have a really low fixed rate mortgage, what we would say in that case is well maybe just have the cash on the side where you can pay it off at any point in time.

Alex Okugawa 3:09
But again, to your point, you have the flexibility, you have the optionality to do that if you choose

Anthony Saffer 3:14
Alright, focus number three is planning for the gap years,

Alex Okugawa 3:17
This is really the time when essentially you earn your last paycheck. When, you are going to have some guaranteed income sources kick in, like Social Security. And during these gap years, again, when you stop working twin guaranteed sources of income kick in, this can provide an opportunity, a golden opportunity for you to do like Roth conversions, right while your income is low. Maybe you can convert some money into a Roth which again, a Roth is great because that allows tax-free qualified tax-free withdrawals in retirement. The other thing people have to be thinking about is what is income I need to replace during these gap years when I don’t have any guaranteed sources of income coming in.

Anthony Saffer 4:03
People often also overlook, especially if they retire early before Medicare or those gap years of hey, I’m leaving my employer where I have health insurance and I’m still a few years away from Medicare, you got to fill in those gaps because be a high expense. Alright, so let’s put it all together into a couple that’s approaching retirement and go through their plan.

Alex Okugawa 4:22
Yeah, so let me lay it out the first kind of like the case study here. And we are going to show images on the screen of how their plan looks. So folks should just stick along here. So again, our client here is Joe and Heather. They’re a married couple who live in San Diego, the kids are out of the house, which means some of their expenses have come down and their income has gone up over the past several years. Right. They’re on the tail end of their careers. These are their highest earning years. They’re currently 56. Now I know the video is for folks that are looking to retire 10 years out but in this specific case, they wanted to see if could we retire a little bit early. Could we do it a little bit earlier? So really what they were looking at He is retiring at 60. We worked through their expenses and based on their current spending, and as you mentioned earlier, if you are going to retire earlier, let’s say before Medicare, are you prepared to pay those higher health insurance premiums if you have to give it on the private market? Or maybe you go on COBRA for a while. So what we determined was that in those early years, we needed to generate $10,000 a month of income.

Anthony Saffer 5:28
Now perhaps an overly simplified way of looking at how much I need to retire on. Or how much do I need to live on, what am I taking home in my paycheck? Absolutely.

Alex Okugawa 5:37
So between their cash, IRAs, and 401, K’s that each of them has worked so hard to grow and accumulate, they’ve managed to grow their money to about $2.3 million. Now, I don’t want people to get focused on the dollar amount here, that’s really irrelevant, really, because let’s say you need less to live on well, then you can have a smaller portfolio, but the more income you need in retirement than the larger portfolio you need. So the principles still apply, regardless of the dollar amounts. And just so people know, in the illustrations that we’re about to show, we’re assuming their investments can grow by about 6% per year, and inflation is running by about 3.7% annually. So let’s take a look at this first image. This is their plan. And this is with them retiring early, at age 60. And what you’ll see is that each blue bar represents one year of their life. And the size of the bar represents the total dollar amount of their investment portfolio that they could turn to, to create income. And again, what we’re seeing here is that assets are projected to last until 87. So this means that they may have to downsize their home potentially cut back spending, etc.

Anthony Saffer 6:49
Now, they may still have Social Security and other direct sources of income. But as far as those extra reserves and their investments, they would run out.

Alex Okugawa 6:55
Now, this is where the beauty of planning can really come into play. So now let’s take a look at some modifications. And we’ll put this on the screen. So if they want to maintain their standard of living throughout retirement, which most folks do, most people do not want to cut back drastically in retirement, what they should look at doing is maxing out their 401 Ks, they can look at potentially working two more years, which is huge for their plan. And if they’re able to reduce their spending by about $1,000 a month, doing all those things in combination with deferring their Social Security until their full retirement age really helps with the longevity of their plans. So again, what folks are looking at is the blue bars were the original picture. The green bars are the positive adjustments of what we’re doing here to make their plan successful.

Anthony Saffer 7:44
Now somebody could be looking at that chart going. Number one, there’s no way I’m living to age 95. And number two is that Well, I certainly don’t want to die with more money than I went into retirement with Absolutely.

Alex Okugawa 7:54
And both are valid points. But I’d say first thing, nobody knows the expiration date on their birth certificate, we don’t know and people historically are living longer and longer. And in the second point, this specific couple did not have long-term care insurance. So they were self-insuring for a potential medical event down the road. Okay, so let’s again, let’s take a look at this example. It’s the same graph as before, but now we’re assuming that Joe has a serious medical event in his mid-80s. And that lasts for three years. And what we’re seeing here is that it has a heavy impact on the portfolio. And the data that I’m using for like the cost of a potential health care event is real data use from we’ve referenced this before the Genworth cost of care tool. But what we’re seeing here is that even if he does have a major medical event, he’s not going to leave Heather stranded, he’s not going to leave Heather without any assets. And so there is enough assets to continue for the rest of her life. So they’re able to, at least from these projections absorb a major health event like that.

Anthony Saffer 9:03
Yeah. And earlier we mentioned about taking waiting on Social Security until their full retirement age. We posted a video previously, which we’ll go ahead and post a link to as far as social security strategies and when to take Social Security. Absolutely. Again, it’s Anthony Saffer with onedegreeadvisors.com

If you’re 10 years out from retirement, and we’d like to learn more about how we can help you prepare for retirement go to onedegreeadvisors.com.

Transcribed by https://otter.ai

The One Degree Blog

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures