THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
Episode 37: Smart Women, Smart Wealth (Part 3) The Retirement Baskets
Remember that great phrase when you were a kid – “don’t put all your eggs in one basket?” Well, that adage could not be more true when it comes to retirement! From taking on too much risk by having too many “eggs” in risky investments to having too many “eggs” sitting in low-risk investments not keeping up with inflation
Most people make financial planning complicated. We think it deserves to be simple. So today we will break all of retirement planning and financial planning into three core baskets: Your retirement basket, your security basket, and your dream basket. Which one do you think is your favorite one?
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I cannot give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
(1:00) Practical Planning Segment: Continuing our theme for this series of Smart Women and Smart Wealth… on today’s episode, we are going to START to discuss the 3 baskets of Financial planning: Retirement, Security, & Dream.
On today’s show, we are mostly talking about the retirement basket. Candidly, there is a lot to discuss when it comes to your retirement basket. What all comes to your mind when you think about your finances and retirement? Social Security, Inflation, Health Care, Market Risk, Taxes, Income/Pension?
If you find yourself confused or concerned about any of these things, you are probably not alone. Having Stress about “retirement” is probably one of the single biggest things we face as we head into the second half of life. There’s just so much to discuss and think about. We could spend 8 hours today going through each of these in detail. When it comes to your retirement, what do you really need? Income!
The beauty of working is you earn income. But when you stop working, do you still need a paycheck? And by the way, do you want that paycheck to come regularly? Because you like to eat right? Seriously for a moment – let that sink in.
What really matters when you retire is: “Where is your income going to come from?” and “How will you get your income to be consistent, and stable?”
(5:00) We know that for most folks, Social Security and we get a lot of questions about when you should take SS. Should you wait or take it early? What happens to your SS if you wait longer until age 70? If you wait to take Social Security, the value of your benefit increases by 8% annually. So, wouldn’t it make sense to wait? Not necessarily.
The truthful answer is – it depends. The truth about real financial planning is that it is “personal.” For many of you listening who are not dependent on Social Security and you do not need the money, you might want to consider taking it early. It also depends on your health.
Consider this example – a wife age 66 and a husband age 68. Their combined Social Security benefits were over $30,000. They are not taking their Social Security yet. Why not? Because they know if they wait until age 70, the annual payout will be higher. Well, that’s fine, but, what if their goal is to travel more while they are healthy, but they are also concerned about spending down their existing assets? If they had an extra $30,000 a year, do you think they would travel more?
Social Security is a real key part of retirement, and unfortunately, most advisors do not spend enough time, if any, on when to take it. This is something we spend a lot of time on with clients. It is an important decision and definitely not a “one size fits all”
(9:00) Next up under Retirement Income are “Pension Plans.” If you have a pension plan, you need to decide again when and how to take it. We cannot tell you how many times I have encountered a situation like the following:
A woman brings her husband into our office with a pension plan. He is planning to take his company pension with a higher monthly income based on his life expectancy. He had simply looked at the math and said to himself “Well, Option A = more monthly money.” The problem with option A was if he died tomorrow, the pension plan benefits died with him. He was getting ready to select an option that left his wife out of his pension benefits when he died. This could cause a massive disaster when he dies, and, by the way, that decision is irreversible.
(10:50) Next, up are 401(k) plans and 403(b) plans. One of the biggest decisions here with these plans is first “what to do with them?” With your 401k plan, you have 2 Questions to Answer.
- What will you do with them – leave them behind or do an IRA rollover? (I will explain this in a moment)
- How will you use that money to create an INCOME stream?
Most Americans have saved in some cases in these plans for up to three decades! The whole point of saving in these plans was to get money from them later – when you retire. Some folks have more than one plan floating around. In fact, with the number of jobs we now have – we very often see 2, 3, 4 old plans when people come into our office. And with married couples, when you include the husband it can be 4, 5, 6, or more old 401k Plans. The technical term for this I think is a “mess.”
Why is it a mess to have old 401k plans left behind when you leave an employer? Well, first let’s talk about your husband leaving these plans behind if you are married. And then we will talk about you. Let’s say your husband had money that he’s left with an old employer. We had one recent couple come in and the husband had four previous employers with 401(k) plans. All the money was sitting in old plans left behind.
First, do we think he is paying attention to these old plans? Of course not. Does he have a clear idea about how to now get income from these old plans? What happens if he dies? What does his wife need to know and do? His wife needs to know first, where are these old plans? Second, she needs to now go back to all these old companies where she does not know anyone and get the old plans transferred to her.
Here is the painful process. She needs to first get death certificates and go through the process of proving her husband has died, and she must prove she is the beneficiary (which she hopefully is). Married women: You need to make sure you are the beneficiary of your husband’s retirement plans. We, unfortunately, do find couples in second marriages where the husband has not removed the ex-wife from his 401(k) plan. Did he do that intentionally? Of course not, he simply forgot to deal with this.
Back to the death certificate… Once she brings these things in and proves she is the one who is entitled to these accounts, she needs to make sure the money gets transferred into her IRA account. If this gets done wrong, the account can become instantly taxable. Take a $300,000 old 401(k) plan and do this incorrectly and pay taxes on it and now you have lost $100,000 potentially to taxes.
What is a better option than going through this potential mess? The better option can be – both for your husband and for you – doing what is called an “IRA Rollover.” This is where you move these old 401(k) plans into an IRA account or accounts that you control completely.
(18:00) POTENTIAL BENEFITS OF AN IRA ROLLOVER:
- Your money is transferred from your 401(k) plan to an IRA account in your name.
- You will not be limited to the investment choices in your old plan.
- You have more control over the allocation of funds and underlying investments/financial products.
- You can do this all without paying taxes on the money until you take it out.
- And then you can create from your IRA an income stream.
- You will have increased beneficiary options (i.e., you can add your children as contingent beneficiaries)
- You can simplify your life. ORGANIZE
Disclaimer: These are not specific recommendations. Your personal situation must be looked at, including fees. The government takes this single issue the most seriously in seminars that advisors present.)
Why did I say SIMPLIFY? Because when you take all these old 401(k) plans and consolidate them into IRAs under the management of one firm/advisor you can see all the money in one place. It is easier to manage – AND the fees may even go down. And again, if your husband does this, if he dies first and you’re working with us as your advisor, you simply bring one death certificate into our office and the switch can be made in days and the money moved into an IRA with your name on it.
(20:00) Why does this stuff matter? Saving in 401(k) and 403(b) retirement plans are about accumulating money for retirement. When you reach retirement, it’s time to get it all organized so you can now work on a plan to spend and enjoy this money. So now we just need to figure out how to spend it, enjoy it and not run out of money.
The biggest thing many retirees face is an INCOME GAP. You worked all your life, and now the question is, where does the income come from in your retirement? Most people have an income gap at retirement because when you stop working now you need a retirement paycheck, right? Trust but verify. And for the single women, you can now trust yourself – you simply need a plan. We all need a plan: Married, Single, Widowed, Divorced – you all need a RETIREMENT PLAN.
(22:25) Coachable Segment: How many of you are old enough to remember that old Wendy’s commercial about “Where’s the Beef?” There were three old ladies at Wendy’s asking, “Where’s the beef?” Great commercial. Totally hilarious. We all remember it, right? Well those of us over age 50. This ad ran in 1984. Here is the thing … when it comes to your RETIREMENT PLAN – it is similar. Instead of where’s the beef – It comes down to three things.
Where’s the money? = the money is more than likely everywhere and doing a retirement plan pulls this all together– seeing all your money in one comprehensive plan will allow you to have complete clarity over your finances so you can stop worrying about your money. Just doing this will help you feel better about where you stand financially.
Where’s the income? = once it’s all pulled together and clarified, the goal is to create an income stream for life that you cannot run out of. Again, knowing where your income will come from, how you will receive it, and how much you will receive will allow you to live your best life in retirement with confidence.
How long will it last? = The entire purpose of the retirement plan is to be able to spend your retirement money and not be worried about whether you will run out. So, we must stress test the plan: Run a test with over 1000 trials and see if it holds up under good times and bad!
We will get into this in a little more detail on next week’s show where we finish up our retirement basket and talk about the Security basket and the Dream basket.
Final Disclaimer: “We appreciate you joining us today for this episode of The Fiscal Blueprint. Remember it’s not about the money but about your life!
Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!
“Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”