Retirement Planning’s “Hidden” Questions

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The retirement planning world is filled with plenty of advice and suggestions, but there are critical questions lurking in the shadows – the unasked, the overlooked. These are the questions that can help define the comfort and security of your retirement future. On this episode, we unearth and tackle these hidden, but essential questions about retirement.

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PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Marc :

The retirement planning world is filled with plenty of advice and suggestions, but there are some critical questions that sometimes get lurking into the shadows or unasked or just overlooked and that’s the questions we’re going to talk a little bit about today here on the podcast. So check it out here this week on Retirement Planning Redefined.

Hey, everybody. Welcome into the podcast. Thanks for tuning in as John and Nick and myself talk about today’s topic, which is some hidden or overlooked questions in retirement planning. So the guys are going to help break this down this week on the show. Thanks so much as always for being here and listening and if you’ve got some questions, make sure you reach out to the guys at pfgprivatewealth.com. That is pfgprivatewealth.com. Get yourself some time onto the calendar and you can also subscribe to the podcast on whatever app you like using. Find it all right there at pfgprivatewealth.com. Guys, what’s going on? Nick, how are you, bud?

Nick:

Pretty good, pretty good. Happy that we’ve worked our way into football season and we’re starting to get some tease of cooler weather. I’m excited about that.

Marc :

Yeah. Very good. John my friend, what’s happening in your neck of the woods? You doing all right? How’s the little ones?

John:

Good. Little ones are good. They’re seven and four. So they keep getting older and a little bit more-

Marc :

Weird how that happens, right?

John:

I know. Personality’s definitely coming out I’ll say. My kids are completely different and we’re like, “How did this happen?” One is very reserved and shy and the other one’s a complete maniac, but they’re great.

Marc :

Yeah. It’s like they look at each other as they’re going through things and the stuff that we don’t see as parents and they’re like, “I’m going to be the opposite of this person,” or whatever the case is. It’s always funny how the siblings, now I just have the one, but I’m one of seven myself so I certainly can relate to the siblings, but myself, I only have the one kid and she’s all of it rolled into one. She’s got a little bit of everything going on with her so there’s definitely nothing happening. There’s nothing hidden about that kid that’s for sure. She puts it all out there.

And that’s my segue into the topic today for retirement plannings hidden questions. I think guys for some of these, they’re not necessarily hidden as much as maybe overlooked is the better term. I think we know it, we keep it in our mind somewhere, but we tend to just either forget about it or we put our focus someplace else during the journey towards retirement. So you’ll see what I mean here with this first one.

The question might be, how much are these tax deferred savings eventually going to cost me in taxes? And so you can kind of see where I’m going with this. If you’re pumping away into the 401k ’cause you’ve been told that’s the thing to do for 40 years, you kind of forget that eventually you know it, but you forget, eventually Uncle Sam’s going, “Hey. Where’s mine?” Right? So how much is it going to cost us?

Nick:

Yeah. I would say that’s definitely a topic that we talk about quite a bit, especially with the required minimum distribution age getting pushed back. Some clients that have allocated a large portion of their retirement funds to pre-tax accounts and then maybe have their expenses low and don’t plan on taking out much money at least initially early on in retirement can get a bit of a surprise when those required minimum distributions kick in.

And so that’s something that we try to plan around where oftentimes accountants are usually focused on taxes today. So a lot of times they’ll suggest, “Hey. Defer those until you only have to take them out and use other money first,” and we tend to try to split that money up, take some of the money out of the pre-tax accounts earlier on, make it kind of blend with some of the other non-qualified funds so that when the required minimum distributions kick in, it’s not such a huge surprise and maybe causes income above and beyond what they expected to have.

Marc :

Yeah. And John, ’cause a lot of people, let’s just use a million dollars ’cause it’s a round number and it’s easy, but it’s kind of sexy, right? It’s got this allure to it like, “Hey, I’m a millionaire.” But if you’ve been pumping this all into one of those type of accounts, you’re not really a millionaire. You’re more like a 700,000 aire because the government wants their share again, right?

John:

Yeah. Yeah. It’s something that’s always there and if you start to look at it, you want to estimate I would say on average, again everyone’s different, but I’d say 10% to 20% you could expect would go to taxes. Obviously if you withdraw it in one year, it’d be a bigger chunk than that, but when you retire, we’re looking at effective tax rates between 10 to 20 sometimes 25%.

Marc :

Yeah.

John:

Not that we like to look at rule of thumbs, but if you’re looking at a balance sheet and wondering, “How much of this is going to be mine?” That’s a decent place to start.

Marc :

Yeah. It’s a good place to start the conversation, right?

John:

Yeah. Yeah, exactly. But it’s something to be aware of and this is where the planning becomes very important to understand, “How much taxes am I going to be paying per year?” And that’s where it’s important, whoever you’re working with when you’re doing your retirement plan, they should be able to show you that at any given year how much you’re going to pay in taxes and that way you have an idea of like, “Hey.’ The big thing with this too, especially this day and age, a lot going on in the world and-

Marc :

Just a little bit.

John:

Yeah. Big question is are taxes going to go up? So if a lot of your money’s pre-tax, and we’re going to get to this later I believe, if taxes go up, that’s a bigger hit that Uncle Sam’s going to take out of your nest egg. So it might be 10% or 15% when you first retire, but all of the sudden it could be 10 years in and that’s a bigger chunk they’re taking depending on the rule changes.

Marc :

Yeah. That’s a great point. And so using that same million dollar analogy here, Nick, the next question that again gets looked at, but maybe not looked at the right way is how much can I pull out of this joker each year? And so talking about rules of thumb a second ago with John, it’s easy to do the back of the napkin and do the 4% thing, but if you did that off a million dollars and you say it’s 40 grand, well if you don’t have a million dollars, ’cause again, you got to pay the taxes and you got more like 700,000, now you’re at 28 grand, so on and so forth. So it becomes a real, I don’t know, sliding scale as to what you can withdraw each year.

Nick:

Yeah. It could be a tricky thing, especially because, and I would say even the landscape has changed a little bit. So for example, clients that retired five years ago when interest rates were really low and the money that they needed to take out of their nest egg wasn’t going to just be this concept of interest only or dividends only because the ability to be able to do that was minimized with where rates were. So we do talk about the 4% rule to give people an idea of and a better grasp of understanding of, “Hey. When you look at your nest egg and you’re trying to figure out how much money can I really take?” That’s an easy calculation for people to make so that they understand, “All right. 40,000 for every million,” because some people are under the impression that they can take out a lot more for example. And so helping them understand, “Well, hey. Maybe not quite,” is a big thing.

And that also, kind of what you alluded to, where 40,000 from maybe a non-qualified account is different than 40,000 from a retirement account because of taxes and especially if they’re living in a state where there’s state income tax, that sort of thing.

Marc :

Gotcha.

Nick:

So we discussed that 4% rule with people so that they have a better understanding of it, but then it really helps us emphasize the importance of having a withdrawal or a liquidation order, helping them understand, try to focus on some short-term, mid-term, longer-term assets and almost kind of assigning a job to different types of accounts because some accounts we’re going to spend down a little quicker. Other accounts we want to let grow, but especially when it gets to times like these where the markets are a little haywire and people are getting nervous, sometimes they want to bail and try to emphasize it’s important to still make sure that you keep some long-term investments in play.

Marc :

And that’s a good point ’cause that’s going to lead me to my next little hidden one here that we’ve been reawakened to John and that’s our friend Mr. Inflation. Not that he’s our friend, I’m being sarcastic, but-

John:

Not my friend.

Marc :

Not my friend at all, right? But we’ve been reawakened to it, but forever in a day it was like, “Okay. It’s just there. It’s not that bad. Two and a half, 3%, whatever.” But now people are going, “Well wait a minute. Is this going to derail my plan?”

John:

Yeah. We are seeing quite a bit of that. Everyone’s inflation rate’s different. That’s one thing that we will say is that everyone has a slightly different inflation rate depending on what you do, what’s important to you-

Marc :

The things that you buy. Yeah.

John:

Yeah. So example, I’ll tell you where I’ve seen my biggest expense has been food. Fairly well and all of the sudden it’s like to try to go eat something that’s a little bit good for you, it’s like, “Man, this is getting expensive.”

Marc :

Exactly. That kind of hit my ear funny. I’m sorry. I’m going to cut you off real fast just to ask you to expand on that some more, but people might go, “Wait a minute. The inflation rate, it’s 4.5%. Why is it different for different people?” But that’s a great point. How you live and your lifestyle, and we’re not even talking like living super high on the hog now, go to the grocery store or other places, you know it’s still not 4.5%. They don’t factor so many things into that number. It’s really kind of a misnomer, right?

John:

Yeah. Everything’s different. As we know, energy costs are different, food, and then what do you like to do in retirement? Do you plan on traveling? Are you doing more activities where it doesn’t cost anything? Then guess what? If you’re just hiking and doing things like that where you live, then not going to be a big impact for you, but if you like to travel and do other things that result you get on a plane, going out to eat, things like that, it’s going to be a whole different experience. Again, we harp on this, but it’s important to do the plan and if you are working with an advisor, maybe they have the ability to categorize each expense and have it have a different inflation rate depending on what’s happening in the world.

Marc :

Nick, are you guys taking into account a higher inflation rate currently for folks to adjust that or do you still look at the historical over the long-term rates and say, Okay. Historically we’ll probably be somewhere back down in that three or 4% range over time?” Or do we need to adjust for that in the interim?

Nick:

So the way that we’ve been handling it, because we think it’s a little bit more efficient to look at it, is it’s a little bit more work. So every couple years we have people update their expenses. So we have an expense worksheet. So the key being that when they update their expenses, we can account for their inflation over the last few years. And then we’ll use a more traditional rate moving forward ’cause the tricky part with using a higher rate is that’s over the lifetime of the plan. So we’re talking 20, 30, 40 years.

And normally that’s not something that happens. So we know that oftentimes there are these spikes, which we’ve had in the last couple years. So we want to reprice that in and take in accounting for what these higher expenses that they have are and then use a more traditional rate moving forward because the amount that we would have to increase it over the last couple of years would be higher than it would be over a 10, 20 year period.

Marc :

Gotcha. Okay. Makes sense.

Nick:

So that’s kind of what we found to be the most accurate. And again, there’s things where, as an example, had a friend that got into a car accident either late last year or earlier this year and they were forced to get a new vehicle versus if they hadn’t gotten into a car accident, they wouldn’t have wanted to. So they were forced to get a new vehicle and with where prices were on used vehicles-

Marc :

At the time, yeah.

Nick:

Yeah. Just like crazy pricing. So that is something that specifically impacts them differently than somebody that doesn’t need to buy a vehicle and can just wait until things slow down a little bit. So that’s just kind of a good example. And we’ve got people who, if they’re renting, I live in downtown St. Pete and I rent and the rent in downtown has doubled over the last five years. There’s things like that versus somebody who’s in a mortgage and that’s a little bit different. So those are just kind of some examples of why we want to reprice where things are at, update our baseline, and then kind of move forward in a little bit more traditional and keep an eye on it.

Marc :

Yeah. And John, you said a second ago, how you’re living, the kind of food you’re getting or whatever, but also where you live. So another hidden question might be, is where I live going to impact my retirement situation? I can’t see how it wouldn’t. What you’re going to be doing there in Tampa, for example, where you’re at John versus where I’m at, I’m in sticks. Just even property taxes are going to be vastly different from county to county and so on and so forth or state to state.

John:

Yeah. Where you live will make a big difference and one example Nick just actually gave where it’s renting versus owning. That’s going to make a big difference depending on what’s happening. But no. It definitely makes a big difference. I was just up in Boston a couple of weeks ago and I saw some of that inflation up there as I was up there and I’m like-

Nick:

Wow.

John:

Tampa’s catching up, but it’s still not there and it’s just like, “Okay. Things cost a lot more up here.”

Nick:

Yeah.

John:

So it does make a big difference and then of course, where you live, is that where you’re going to spend most of your time? Again, are you traveling? You know what I mean?

Marc :

Well with Florida being a retirement destination, a lot of times people will do the moving to Florida. I don’t know if I would move there just for the tax benefit. Is that big enough to wag that dog or it should be moving there because you want to move there for various other reasons? Oh, and then there also is the benefit of the tax situation. Is that a better way of looking at it or just, “Hey, we’re going to move from New York to Florida because the tax rates are better.”

Nick:

I would say that the lifestyle that people used to have when they came to Florida, and this is in all parts of Florida, but obviously Miami, Lauderdale, Naples have always been pretty high and areas like Tampa and St. Pete have lagged a little bit, but now a regular middle class home in Tampa is going to cost you 500 plus thousand where six, seven, eight years ago it could be you might have to move out into the suburbs a little bit more, but the high twos to 300. And so it’s going to be interesting to see how it does impact that traditional, unless you’re coming from a city like a Boston where the values are still much higher.

Marc :

New York. Yeah.

Nick:

There’s a lot of places where, I’m from Western New York, Rochester, New York, the value of the homes were never that high, but the tax difference was substantial and now it’s a lot cheaper to live there even with the taxes than it is here to have the same sort of house and neighborhood and when you factor in car insurance has gone insane here, property insurance has. So it’s going to be interesting to see how it impacts it.

Marc :

For sure. Well let’s do the final one here. We’ll wrap up with pit questions and Nick and I were just talking about some significant ladies in our life getting into hockey, his mom, my wife. And I asked my mom, I was like, “Hey, you want me to take you to a hockey game?” And she’s 82. She’s like, “Honey, I could never get all the way down the stairs and then back up again.” But the question becomes is should we be planning, especially if you’re in this what they call the sandwich generation, if you’re in this 45, 50 range, 55, for caring for your elderly parents. It’s certainly happening happening more and more.

John:

Yeah. I would say definitely something you want to look at in your plan and something you just want to be aware of it and the potential of that happening and then you want to have conversations with siblings if you have siblings on, “Hey. If this were to happen, what are we going to do in this situation?”

Marc :

What do they have? What does mom and dad have? And then what do we need to shore up possibly?

John:

Yeah. So it’s having all these conversations with the whole family of, “Hey. Do you have long-term care insurance in place?” “Okay, you don’t. Okay. What’s the nest egg? What’s the income coming in?” So something you definitely want to have a discussion on and I think Nick has shared a couple of stories and I have a couple of my own where we’re seeing where maybe it’s not financially impacting the couple that’s retiring, but it’s impacting their lifestyle. So I’ve had some scenarios where clients couldn’t do the things they wanted to do because they were caring or taking care of a parent, not necessarily financially ’cause the finances were fine, but they were physically doing things and had to be present. So it really impacted some of the things that they were able to do.

Marc :

Yeah.

Nick:

Yeah. I can speak to that ’cause my grandmother lives with my parents. It’s been over 10 years now.

Marc :

Wow.

Nick:

And it’s real life for them as far as what John just talked about of being able to travel and do the things that they want to do. They get some breaks where, for example, now she’s up staying with an uncle up in Rochester. So they’ve been doing a little bit more like traveling and trying to do things to enjoy that, but-

Marc :

They have to plan out their activities more.

Nick:

Yeah. Much more so. And let alone the stress of taking care of someone and all that kind of thing. So I think that one of the best pieces of advice to potentially give people is to, and that generation can sometimes be a little more difficult when discussing money. It feels like they’re getting a lot better, but being able to have conversations with them to understand what do they have? Do they have their documents in place? Who are the executors of their estate? Or is it a will? Is it a trust? Is there going to be issues that may be a fallout from how things are written? What can be done now to clean that up? And even things from the perspective of, ’cause sometimes parents will start to want to gift money or do different things and we’ve seen that that generation oftentimes has a lot of non-qualified money.

So maybe it’s stock accounts or things like that where if they sell to try to gift some cash to kids or grandkids or whatever, they can incur some serious taxes ’cause oftentimes that generation has held their accounts for a long time. And so even just understanding like, “Hey. Well if you leave these types of accounts after you pass, it’s going to be much more tax efficient than leaving these other types of accounts.” So let’s be smart with how we have some sort of liquidation in there and work through that.

Marc :

Gotcha. All right. So those are some hidden questions that you may want to consider and have top of mind or at least readdress when you’re talking about getting a retirement strategy into place. So if you’ve got those questions, again, reach out to John and Nick and subscribe to the podcast. Find all the information at pfgprivatewealth.com. That is pfgprivatewealth.com and subscribe to Retirement Planning Redefined with John and Nick on Apple, Google, or Spotify to catch future episodes as well as checkout past episodes or just find it all at pfgprivatewealth.com. For John, for Nick, I’m Mark. We’ll catch you next time here on the podcast. This has been Retirement Planning Redefined.