Jacob: Hello, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm a certified financial planner. And, in today's episode, we are gonna be talking about three things that you should do before you retire. Now I know if you're approaching retirement, you're likely, beginning to think about all the different things that stand in your way, all the questions you have, all the concerns and fears that come with that because the reality is is you want to retire and you wanna do it one time.
You wanna do it correctly the first time. You don't want to, mess this up because you kinda don't have the opportunity to mess it up. Right? And so, you have many questions that come with that. But in this particular episode, just wanted to tell you about three things that I think are important to any successful retirement plan.
So let's go ahead and get started. Number one, and I cannot emphasize this one enough, but it is to build up cash. And the reason for this is far too many people that I encounter and talk to come to me a month before they retire and they're like, hey. I've got a million bucks saved or $2,000,000 saved in my four zero one k and it's all tax deferred, but I only have, like, $25,000 in my cash account at the bank. And, obviously, it's great that they've saved and done this and they've invested well for retirement, but how and where your savings are becomes almost as important as how well you saved.
And here's why this matters. In this situation, I just presented to you, this person, perhaps they have a tax deferred four zero one k and holds all of their money, whether it be a million bucks, $2,000,000. This means that every dollar they take out of their account will be taxed at normal income rates whenever they distribute that money. And if we throw Social Security on top of that or a pension, now you're looking at paying nearly the same amount of tax as you were while you were working. So I find that to be the case.
So, actually, a lot of times for folks that are in retirement, they're paying the same amount of tax, if not more, in retirement because of where they're having to pull their income from. Additionally, having those, distributions come and count as income will increase, you know, how much of your Social Security is taxable, which will leave you with less of your Social Security benefit each month. Here's what cash in the bank can do for you. It gives you flexibility for your distributions. Right?
So cash is a tax free asset. Whenever you take it from your bank account or your taxable investment account, you can take that money tax free, meaning you don't owe taxes on it. So it doesn't actually go as a line item on your tax form, and it does not count towards your adjusted gross income. So simply because of how cash is taxed or in this case, not taxed, you're able to split where you pull your money from and live on in retirement. So for example, if you got a million bucks saved in a four zero one k and then you have your, cash account there at the bank or your taxable investment account, if you can pull money from your four zero one k, also pull money from your cash account, and then also have Social Security income coming in, we can structure that in such a way that only a portion of that IRA or four zero one k distribution is actually taxable.
And in fact, we can probably do it in such a way that depending on how much, you know, cash you have saved, we can do it in such a way that you don't pay tax on any of that income. So this just gives you a lot of flexibility and options in retirement. Also, if you have over a million bucks saved in a tax deferred IRA or four zero one k, one of these days you're gonna have large RMDs, whether you're already taking them at 72 or, for everybody else moving forward, it's gonna be either 73 or later. But once you get to that age, you're gonna start taking RMDs. And if you got over a million bucks saved in a deferred asset, those RMDs are gonna be $50,000 plus.
And that goes on top of all your other income. And this is a forced distribution. Right? You don't have the option to not take it. Therefore, you're just gonna pay tax on it and then perhaps reinvest it if you don't need all that money.
But either way, it's going as a line item on your tax form where you have to pay tax. And here's one more final point, as to why cash is important to any retirement plan. You've probably heard me talk about it. You've probably investigated it yourself, But what are the benefits of doing Roth conversions? That's something a lot of people are concerned about and look at because they don't want that RMD issue, at 72 or 73 and beyond.
They don't wanna have to take money, and they wanna lower their lifetime tax bill. So Roth conversions can be a great tool to do that. But having no cash limits how much you can do in conversions because if you have to withhold, taxes from your IRA to do the conversion, it might still be beneficial to do those conversions, but you're you're eating into a little bit of the benefit because it let's say you have to do a $100,000 conversion. Well, if you have to withhold 20,000 or $30,000, you're technically only getting 70 or $80,000 into your Roth IRA, which means you have to dig out of a 20 or $30,000 hole before you even get back to break even. And then obviously that takes years to do so.
Right? So that's the benefit of having cash. If you can pay the taxes on your Roth conversions from cash, you immediately get more money working in the Roth IRA, which is tax free growth, which is the benefit of having that account. Right? So that is another thing to consider is having cash allows you to do more in Roth conversions and allows those to me to be more beneficial for you.
So number one, build up cash as you begin to think about retirement. Alright. Number two, figure out how much you are spending on a monthly basis. Knowing how much you spend on a monthly basis is key in determining what your monthly income needs will be in retirement. If you have no idea about how much you spend, well, how can you get an accurate estimate of how much you'll need to distribute from your portfolio?
And then if you think about it, if you don't know how much you're you're actually spending, then you can't really tell if you can truly retire or not. If you're spending more than you think, then you're gonna have to distribute more than you think, which is a higher, percentage of assets being sent out of your accounts each year, which might actually cause you to be able to not retire. So if you think you only spend 4,000 a month, but you're actually spending 6,000, this will drastically change your plan for retirement or even your potential to even retire at this moment. So here's what I would do. I would go through your last six to twelve months and count how much you have spent each month and then average those out, in such a way that you can figure out what your average monthly spending is.
And I know this is not fun. No one likes to go count, you know, where they're spending money and and go pull all their statements and everything like that. But as someone who's getting close to retirement, it is crucial to know how much you're spending. Because, if you've got a mortgage, if you got a car payment, if you've got fixed expenses like that, those things, they they matter. Right?
So we have to know how much we're spending on a fixed basis monthly, but then also our variable expenses. One thing I'll say here is be sure to not leave out all of the quote random purchases or one off purchases that happen, you know, obviously monthly. We we think that these things are one off. The the thing that is random about them is not that we're spending the money. It's just what we're spending it on.
And so I say leave all of those things in because there's always something that comes up. A good example of this is, you know, if I'm talking to somebody and there's and I ask, know, how much do you spend, you know, kinda on a monthly basis? And they'll say December was a expensive month, you know, with Christmas gifts and everything. And I'm like, well, perfect. That everybody has to do that every year.
Right? Like, that's a portion of your spending, and we should anticipate that each year. So we have to calculate that, and we had to leave that in to help get an average annual spending. So once you have an average of what you spend over the last six or twelve months, this is about what you could probably expect to need each month in retirement. A common misunderstanding I see often is that people think they're gonna spend less in retirement because they're retired now.
And I don't understand that fully, because your expenses are your expenses. Like, if you have a mortgage, then you have to pay your mortgage. If you have a car payment, like, you have to keep paying your car payment. Typically, your variable expenses remain the same in terms of how much you spend on food, groceries, gas, the whole thing. And I would maybe even suggest that perhaps your expenses are gonna increase because now you're maybe trying to move to a different state, move to a different city, you have to buy a new house, you're wanting to travel more.
All of these things factor into how much you're spending. And I'm not sure how we came to this conclusion that people spend less in retirement. So I would just say, hey. Whatever your monthly spending is right now, that would maybe be the most accurate number, as you transition into retirement. Then we can know how much we would need to generate, whether it be from your IRAs, Roth IRAs, cash accounts, investment accounts, and then whether or not we need to begin taking Social Security now because we need the income or if we're able to delay it to the future to help us do some other planning, strategies along the way.
So that is number two. Figure out how much you are spending on a monthly basis. And number three, create a list of things that will be important for you to accomplish or do during your retirement. Here's the deal. A lot of what I talk about is on the financial side of retirement, but at the end of the day, none of that matters if you aren't enjoying your life and doing the things that you want to do.
I'm not really a fan of calling these things goals, but I think that's maybe the most accurate representation of what they are from a simplicity standpoint. But I think that these are more than goals. Like, these are dreams and hopes and wishes, and these are things that will be fulfilling for you as just someone living the rest of your life in retirement. Here's something I like to live by. Money isn't the end.
It's just the means by which we get there. So my job as a retirement planner is to help you organize and optimize your money in such a way that you can go enjoy life without having to think about it all the time. Things like traveling, you know, making sure we have enough, assets to do that. So understanding your why, which is is the purpose of creating this list, like, why do we want to save money on taxes? Why do we want to make sure we optimize our Social Security income?
Why do we wanna make sure we're not spending too much of our portfolio too quickly? It's because of these things, whether it want you want to, you know, move closer to kids or grandkids, or you wanna be more involved in your church or local charity, or you want to buy a new house and move to that different area. Those types of things are kind of the why and kind of your purpose in retirement. And so the money fulfills those things, and that's why we wanna make sure we do that accurately. But the reason I encourage you to create this list is so that you have your why established.
Like, you can create your purpose, and then we can strategize and create different plans from a money standpoint to accomplish those things. So I encourage all my clients to to view retirement not as what they are retiring from, but what they're retiring to. Thinking about retirement this way creates a mental shift and gives you a sense of hope and joy as you enter this new phase of life. So just to wrap it up, what are the three things that we wanna do before we retire? Number one, it is build up cash.
I think that is super important to giving you ultimate flexibility throughout, your retirement. Number two is to calculate how much you spend on a monthly basis. That way, you know how much you will have to be distributing, throughout your retirement. And then number three, writing down all the things that you want to do in retirement and creating that list so that we have a a purpose and hopes and dreams and goals, to accomplish, but then also give us purpose in why we're doing the money things So those are the three things that I would say, hey. These are important to do and know before you retire.
I hope this is helpful and you've enjoyed this. And as always, this has been Retirement Answers. My name is Jacob Duke. I look forward to talking with you again next week.