Jacob: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host as always. Today on the show, want to share with you five things that you should probably stop doing before you actually retire, and I want to give you some alternatives and tell you what you should think about instead. So let's just go ahead and jump into it.
The first thing that I see whenever someone comes to me and say, Jacob, I want to retire, can I do it? The first problem that I often run into is very little liquidity, and by liquidity, I mean, very little after tax money, whether that be in a brokerage account or whether that be in cash in the bank. So one of the things that I often recommend is what if you stopped saving to your four zero one ks and started building up cash in the last year or two of your working career? That's So number one is what if you stop saving to four zero one ks up to the match, right? So don't contribute more than the match and start building out your cash reserves if you don't have that built out already because what this does is, it gives you flexibility as you enter this next phase of life.
Of One the biggest things that I focus on when it comes to retirement capabilities and what you can do in retirement and able to enjoy as much as possible is flexibility, but you have to create that for yourself. You have to actually build out flexibility from a tax standpoint, from an income standpoint, reducing volatility in retirement from an investment standpoint, all these things are important to you actually being confident in your retirement and your ability to retire, but also giving you the flexibility to make decisions rather than when it comes to an example being your income, rather than all of your income having to come from a tax deferred source just like your four zero one ks or a traditional IRA because that's the only place you saved. So what you're doing here by reducing how much you're saving to your four zero one ks and actually moving money and saving it into a cash bucket at your bank, is you're building out what I call tax diversification. And again, I've talked about this, you know, endlessly on my podcast here, but tax diversification is something that's crucial to any retiree when it comes to lowering your overall tax bill throughout your life.
And there's plenty of reasons to have money in all three buckets, but those buckets again are tax deferred, tax free and then taxable. So think about a traditional account like a four zero one ks or traditional IRA, but then you have Roth accounts like a Roth four zero one ks or a Roth IRA, and then also that last bucket being a taxable bucket, that is your, you know, your normal investment account or your brokerage account or perhaps even a trust. So those are the three different types of accounts that you typically have when you enter retirement, and if you can have money in all three in fairly equal proportions, that's awesome. Most of the time people do not have that in equal percentages across their overall portfolio. Most of the time people have a tax deferred being a large sum of their overall nest egg just simply because of the way that they've saved over time.
So that's the first thing is if you can maybe think about how can I stop saving to my four zero one ks at least as much, what if I'm maxing out right now, can I just reduce that back to 10% of my paycheck or just reduce that back to whatever gets me the full match, and then anything above that, you can then save into your cash account or your bank or even put that in a brokerage account, and by doing this, you might be thinking Jacob, but if I stop putting money in my four zero one ks in the tax deferred side, I'm gonna have to pay income taxes on that money to get it into my bank account, and you're exactly right, you are, but you have to think about the full picture, the big picture? So like example, next year, let's say you retire at 60 or 62, well, if you're before 65, you're likely gonna have to go find private insurance and you might wanna try to qualify for ACA subsidies. But if you need a certain amount of income every single year to meet your basic needs in retirement and enjoy life, then depending on how much money you actually need, if all that has to come from your traditional IRA or a tax deferred four zero one ks, you might actually eclipse the subsidy thresholds, which means you're gonna pay a high premium on your health care insurance.
So by paying taxes today, depending on what rate you're paying them at based on your income while you're working, it might not make sense to do this, but you have to evaluate it for yourself. But hypothetically, let's say you paid tax today while you're working, so that you could reduce your health insurance premiums and qualify for those ACA subsidies there in the first few years of retirement. So that's just one example of how reducing your four zero one ks contributions, especially if you've reached a point of, hey, I've got enough money actually in the account, I just need to make sure it's invested correctly from here on out. That's a really good place to be because you have the option to reduce how much you're saving, you're not trying to catch up if that makes sense. Also, builds out the opportunity to have cash on the sidelines to number one, whether any market volatility or any market scaries that happen.
So sequence of return risk is a big deal. You don't have to sell your portfolio whenever it's gone down. And then also to having cash on the sidelines allows you to maybe do Roth conversions and think about doing that strategy so that you can lower your taxes throughout your lifetime. So just, I'm telling you, having cash on the sidelines, having cash available to you in an after tax capacity in your bank account or in a brokerage account, like in a money market, you have options, and that's the purpose of mentioning the first thing maybe you should stop doing, and what you should start doing instead. The second thing that you need to stop doing whenever you are getting closer to retirement is stop looking at how much you have and focus on how much you need.
And the reason that I say this is because most people end up over saving for retirement because they have no idea how much they actually need and they think they need 1,000,000, 2,000,000, 3,000,000, 5,000,000. And what I'm here to tell you is this, you need however much money you actually need. It's not a certain number that the internet says you need, it's not a rule of thumb, it's not an average that you need for retirement, what it is is always based on your spending, but here's the problem, most people have no idea how much they spend or there's just a lot of money kind of seeping out and leaking out every single month out of their accounts for whatever it might be, just random spending that pops up. So here's the suggestion, get dialed in on how much you actually spend monthly, and then forecast that into retirement. So if you've got a mortgage right now and you won't have a mortgage in retirement because it's gonna be paid off by then, well, I wouldn't factor in how much you're spending on your mortgage today into your retirement spending in the future.
Think about how much you actually need to spend at that point of retirement and then back into how much money you truly need, because again, I think you might find that you have more saved already or you will have more saved at the point of retirement than you otherwise would need based on a sustainable portfolio moving forward. And what this could do ultimately is this could say, hey, said of retiring at 65, what if I retired at 62, three years early because I found out how much I needed every single month, I know where my income sources are gonna be, whether it be from my portfolio, whether it be from social security, whether it be from a pension or any other rental incomes or anything like that. Where's my income coming from? And that tells me how much I need to actually pull from my portfolio or is all of my money coming from my portfolio until I reach Social Security age? There's so many different things that you've got to factor in here, but I want you to not focus on how much you have and kind of get into this comparison game with your friends or your neighbors or your coworkers.
What I want you to do is focus on how much you need from a monthly spending standpoint. So that's number two. Number three is stop focusing only on the money start building a plan for the non financial side of retirement. This is a huge one. I talk about this again a lot.
So if you've listened to any of my episodes previously, you know that I always harp or focus on the actual life side of retirement, not so much the money. So the money side, you gotta do that really well, that's a given, that's table stakes, we know we have to execute that, execute tax strategies and social security timing and income planning, all that's gonna happen. But what happens there is most people stop there. Most people get stuck there, they get in this analysis paralysis around the money side, and what ends up happening is you get to retirement 62, 65, 70, whatever your age of retirement is, and you get there, and you've got all the money stuff dialed in, you've got it figured out, but then what? Once it's figured out and dialed in, stop touching it, stop playing around with it, right?
Whenever I see people playing around with it a lot and trying to tweak numbers and really optimize it to the nth degree, what that really tells me is that they have nothing else to do. They have no life to go live, they have no people to go enjoy it with. And so my emphasis is this, go find the people you want to be with, find the community you want to be around, to go find what you want to actually do, what are your hobbies, what are things you're gonna pick up, what are you gonna change, right? And go do those things and stop focusing on the money. So again, once you've built the plan, once you've got the financial stuff laid out, once you have that all there and you're confident in it, stop worrying about it, stop focusing on it and go do what retirement is really for, and that's enjoying life with the people you love doing what you love most.
That's what it's about, and that's what I want you to focus on. Stop focusing on the money once you get to this point, build a plan and start thinking about the non financial side, the personal, the emotional, the mental, the spiritual, whatever it is that's important to you, and whatever would give you the best life, whatever it is that helps you achieve your dream retirement, whatever you thought of twenty years ago and you thought, man, when I get to retirement, I'm gonna do this, this and this. When you get here, go do that. Stop worrying about the money and go do that. The fourth thing you have to stop doing before you enter retirement is ignoring taxes and learn how they work in retirement.
Again, tax planning is a big deal, in fact, it's what I focus on probably the most with my clients. It's one of the things that's easily, you know, changed, we can pull so many different levers, we can actually do real planning around it, we have control over it, at least to an extent. When it comes to investments, we have some control, but at the end of the day, we are at the mercy of the markets and the companies that we're buying. We're not so much in control of how they perform. Now, with taxes, we can control that to a larger extent, right?
We have tax code we have to follow, we have tax rates that we have to adhere to, but the key is once we get to retirement, our income is not a W-two income, we are not paying payroll taxes anymore and everything is not just the same every single year, every single month. We have different sources of income and they're all taxed differently. We have capital gains, which can receive qualified dividend treatment if they're dividends from stock funds, they can also be long term capital gains, which are cheaper tax rates than normal income taxes. You also have social security income, and it's gonna be taxed again completely different from normal income. And then you have maybe normal income, which is gonna be from an IRA distribution, and you also have Roth IRAs or Roth four zero one k's that you could take tax free income from.
So there's multiple sources and they're all taxed differently and they can be pieced together in different ways to meet your ultimate financial goals, but also lower your taxes throughout your life. So stop ignoring taxes because, you know, while you're working, you're just working and you're making money and you do your tax withholdings on your paycheck and you just, that's what you pay, right? Well, once we get to retirement, we have full control over that because you can withhold however much tax you want out of an IRA distribution and depending on your decisions and how you want to structure your tax bill and how you wanna structure your income, we have full control over that. And I want you to understand and learn how that works, because again, I'm telling you, you can piece together your income from different sources, what I call income stacking, you can stack your income from an IRA, from Social Security, from a Roth, from a brokerage with capital gains, all these different places, and pay next to nothing in taxes when you do it correctly. And most of the time these opportunities are found before you get to Social Security or even before you get to your required minimum distribution age.
So you have to take advantage of it in the early stages of retirement, do all your tax planning then, because once you get to RMD age and those forced distributions start happening, basically a forced taxation, your hands get a little bit tied and you don't have as many options. So, we've got to focus on this in the early stages of retirement, but that's the key, stop ignoring taxes and really learn how they work in retirement because it's a completely different playing field once you get there. And the fifth and final thing that we need to stop doing before we get to retirement is ignoring our estate plan. Jacob, I don't have enough money, I don't have 10,000,000 I don't have $30,000,000 I don't even have real estate, I don't own a house, just rent. Why do I need a full estate plan?
Well, here's the problem. If you have any money, any dollars, you likely need an estate plan. Now, what I mean by estate plan is not just a will, it's not just a power of attorney, it's all of these things combined, they work together. And in an optimal situation, you're gonna have a revocable living trust, something that says, hey, I own my money, it's inside of this trust document, this mechanism that says once I get hit by a bus, it goes to these people, right? This person's gonna be the executor of this trust, they're gonna make sure it actually goes to who we want it to go to and when they want it to go there.
We've got trustees of this trust, we've got people that are supposed to receive, you know, dollars out of this state that could be there and when we want them to receive that money. So what this does is it gives number one, you full control over who gets what and when, okay, that's the first thing. The second thing is it eliminates all the confusion that your family members, your kids, your heirs, whoever's behind you, it eliminates all the confusion, the fighting, the arguments that could come from, well, dad or mom said to me that I get this, and then that can be contradicting what someone else in the family said that you said. So all the verbal estate planning, that's helpful, you wanna state your wishes for sure, but write them down and make it legally binding. Make it legal so that no one can dispute or argue what is on paper.
Obviously, what is on paper? So what this does is it number one gives you a peace of mind just to know, hey, whenever I pass away, my things are gonna go in this order to these people and that's exactly what I want to happen. And then number two, you can rest assured that, hey, this is what I said, and these kids or grandkids or heirs or whoever it might be, they're not gonna have any issues because I've made the made this really easy for them. I made this really simple for them to distribute the funds and know who's getting what, and they don't have to argue about it and decide between themselves, which could create family issues. So the estate planning piece, it's huge from that regard, but also helps on taxes too, potentially, depending on how you set it up, and then also who gets what and when.
So for example, let's say that you want to give half of your retirement savings to a church or charity upon your passing and the other half goes to your only child. This is an example. Well, if you wanna do that, the best way to do this is to leave any tax deferred money to the church or the charity, because they receive that money completely tax free because they are a charitable organization. If you left your IRA or your tax free money to your child, guess what? The ten year rule is going to be applied there and they will have to distribute that money out and be taxed accordingly.
Now, let's assume that you have a brokerage account, you have some real estate, you have maybe a Roth IRA or something like that. Let's first give all of those assets to your child because all of those either get passed along tax free in the case of a Roth IRA or Roth four zero one ks or they get a step up in basis in the case of brokerage accounts, trust accounts and real estate. So anything that's a non retirement account gets a step up in basis, so that's a tax free event for your heir or your child in that scenario. So how you structure who gets what even whenever you outline your trust in your estate plan, not just dividing it in half on every account and saying this person gets this and this person gets this, you can go even more strategic and say because of the type of person receiving this, whether it be an entity like a charity, or whether it be a brother or sister, or a husband or a wife, or a child or a grandchild, depending on who's getting what and how they're getting it, you can divide that up accordingly and be really thoughtful about it so that you can reduce their total taxes once they do receive it.
So these are five things that I think you should stop doing before retirement and the alternatives and what you should be doing instead. So hopefully this continues to build the right framework and mindset as you get closer to retirement or if you're in retirement, maybe these are some things that you can start doing or catch up on if you're already there and have not done them. So let me know your thoughts and I'd love to hear from you. If you've got questions you want answered here on the show, there's gonna be a link down the description for you to send and submit me a question. I'll have that answered hopefully here on the show in the near future.
Also too, if you got a question directly for me or you're looking for help with your retirement plan, you can click on the link down below where it says to book an intro call and happy to have that free intro call with you and just get to know you a little bit and see if there's anything that I can do to help you out. Alright, I hope you have a great rest of your week and we will talk to you again very soon. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode.
I look forward to talking with you again next week.