Jacob Duke: 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, I wanna talk about eight common mistakes that I see retirees making all the time. As a retirement planner, someone who helps people just like you build retirement plans, execute them consistently over time, I wanna give you these different mistakes so that you don't make the same one.
So I'm about to jump in. But first, if you're new here, welcome. Again, my name is Jacob Duke. I'm a certified financial planner and the owner of River Tree Wealth, a retirement planning firm that helps people just like you plan smarter and retire better. Alright.
What is the first mistake that I see all the time? Number one, it is not knowing your true spending number. Now the hard part here is multifaceted. So let's start with the first thing. As you're going through life and you're perhaps earning more money than ever and you're preparing for retirement, the odds of having a strict budget or something that you follow month to month is a lot lower as you're getting closer to retirement because your income is higher than ever.
You just kind of spend what you need to spend and want to spend, and you don't have to worry about a lot because you're maybe maxing out your four zero one k's already or maxing out other accounts. So your savings is taken care of, and whatever's left over outside of that, you're just spending it and enjoying it. So the hard part with that is whenever you get to retirement and say, well, how much do I spend every month? Or how much will I actually need in retirement? If you aren't keeping track of that along the way, it's really hard to know what your true spending number is.
So the first recommendation I wanna give you here is go back over the last twelve to twenty four months, and I want you to find your monthly average over that time period. Now, what I don't want you to do is make excuses and say, oh, well, Jacob, I I need to leave that thing out because it's kind of a one off, and we we don't replace the roof every year, and we don't put new tires on the car every year, and we don't do this or that. What I want you to do is leave all of that in. Okay? And I want you to leave the one offs in because the thing about one offs is that even though they happen irregularly, you're always having one.
So it doesn't matter if you only have an issue with the car every four years. There's something else in those other three years that is a one off. Therefore, leave all of them in because that's an accurate spending number. Those things likely will continue year to year in the future. So don't take all those things out.
Leave them in and say, this is the average spending number without anything subtracted out. Now, what I want you to do even further within that is kind of find two numbers. Number one, what have you been spending without thinking about it? What's your your your normal spend number on the high end? And then what could you spend or what could you reduce that down to if you had to cut back and just have a bare bones budget?
Now by doing this, what you're doing is establishing a floor and hopefully a ceiling. So you're establishing this range of spending. So maybe that would look something like, hey, I spend $10,000 every single month normally. But if push came to shove, I really only need 5,000 just to get to the next month to cover your insurances, enough food, maybe some gas, all of the necessities. Right?
Maybe 5,000 is how much you and your family need every single month. But you normally spend 10. So that's establishing that range, that 5,000 to $10,000 spending range. So that's the first order of business is really get a good understanding of what your spending looks like without thinking about it, without saying, hey, well, my spending will go down in retirement because of x, y, z reason. What I want to give you here next is say, now take that number that you normally spend, let's say it's $10,000, and add 20% to it.
Because whenever you get to retirement, what's going to be what's going to happen here is it's actually interesting. Most rules of thumb suggest that you would need less money or less income in retirement because you might spend less. I've seen the opposite happen when my working with clients. I see people spending more than before they retired. Now, why would that be?
Well, number one, maybe it's time for them to go enjoy and, go do the things that they've longed to do, take the big vacation and go on the trip and and kinda go do the things. That cost money, obviously, but also, if you think about it, if you've been working all day, every day for your entire career, you have less opportunity or less time to go spend money throughout the day. Now if you retire and you've got freedom of time and can do what you wanna do, typically, you're gonna spend more. Now how do I know this? Well, I'm obviously not retired, but I do have a wife and she does not work.
She stays at home with the kiddos. She definitely spends more now staying at home compared to whenever she did work. K? So I know that firsthand from experience. And and so maybe the same thing could apply to you, and I've seen this in our clients' lives that we work with.
So people typically spend more when they have more time to spend. And then also, whenever you do get to retirement, especially during those go go years, you're likely gonna spend more just so you can go enjoy the trips and do the things you've been putting off and checking off those bucket list items. So the first mistake is when someone enters retirement, making an assumption. Hey, I'm gonna need x amount of money because that's what someone told me you need for retirement, or maybe some multiple of your savings or your earnings or, hey, I'm gonna have I just need 80% of what I've been earning from an income standpoint. Well, that could be completely wrong because who cares what you're earning?
It's really about what you're spending. And so number one, figure out what you've been spending over the last twelve to twenty four months on average. Use that number as you run projections, but then also test your plan by adding that 20% number to it, especially during those first five to ten years whenever you likely will be ramping up spending more and going and enjoying. So number one, you gotta know your spending number. Now, number two is in relation to your spending, but one of the mistakes that I often see is that everyone assumes that their spending is going to increase over time with inflation.
Now, how can it be true that many retirees actually pass away at the end of their life with more money than they started retirement with? How is that possible if their spending is increasing over time with inflation? Let's just use three or 4% annualized. That can't they both can't be true. Because if so, that means they have to greatly outperform the inflation amount every single year from an investment perspective, and those things likely don't happen at least at a large scale.
So what I've seen is actually people spend more on the front end of retirement, let's say the first five, ten, maybe fifteen years, and typically once you've gone and enjoyed and done those things like we were talking about, your spending will decrease. You likely don't have a mortgage at that point. You, aren't traveling quite as much. Your your overall needs are not as great, and your discretionary spending is not as high either. So your spending typically goes down at some point.
We might think of this as the retirement spending smile, higher on the front end, lower in the middle, or the increase is lower in the middle, and then maybe there's an increase on the back end from a health perspective, or long term care perspective. But to assume that your spending will just go up over time with inflation, I think is a major mistake. And what ends up happening here is your plan is actually getting really conservative. You're planning very conservatively because let's say you are spending, I don't know, a $100,000 a year right now. Well, at age 90, are you really gonna be spending $300 every single year?
I don't think so. You know, maybe there's some, justification of that if you've got health concerns, but that doesn't mean that you will year after year after year, and it won't be slightly increasing over time. So at 85, you won't be spending $2.70. Right? Like, that doesn't make sense either.
So to assume that your spending will increase over time with inflation is a misconception, but what's really the problem here, Jacob? The problem is that if you plan that way and think through that mindset, your plan is going to be, spending more on the back end, and and it's assuming that you're spending more on the back end. And what that might cause you to do is not spend as much on the front end because your chances of success, if you're looking at Monte Carlo simulation, your chances of success could end up being lower than otherwise would be accurate. So that maybe forces you to not spend as much early on during your go go years or not enjoy life, ultimately causing you to be really conservative in your spending early on when in fact that maybe is when you should be most aggressive with your spending because that's your chance. You have your health.
You have the opportunity to go. You don't know when you're not going to be here. You don't know when your health is not going to be the same. That is when you need to go spend. So if you're assuming that spending will increase in inflation over time, you could end up spending less than you otherwise should or could be early on in retirement.
So that was mistake number two. Now mistake number three is investing too conservatively. Now this one here is a psychological and emotional problem that every human has. Jacob, I've been working. I saved one, two, three, five million dollars, whatever you've accumulated over your career.
I can't afford to lose it now. That's the first thought. Right? Like, just how can we protect it? How can we keep it safe?
Because I gotta have this. It's gotta last me twenty, thirty, forty years, however long your timeline might be. Now, the problem with going ultra conservative in a retirement portfolio is you lose the opportunity to outpace inflation if you have too much fixed income or cash on the sidelines. So what you've got to think about here is, how do I cover my short term needs? Think the first five years, five to eight years, really.
And then how do I cover all of my long term needs? You've to find a well balanced approach to your investments because you can't go ultra conservative and let your money just sit there getting one, two, three, four percent interest, and then never think about how much you're losing and buying power over time because you weren't investing at least in equities or something that can grow in a higher rate. So investing too conservatively is a natural response as soon as you cross over into that retirement time frame or time period of life, but you've got to build out a well rounded and kind of all weather portfolio. The way that I like to do this is build out a three bucket approach, and it it can be more complicated than this for sure, but I like to break it down in simple pieces. So the first thing is bucket number one.
We've gotta have cash. Right? I want two years worth of living expenses in cash. Now bucket number two is I want three years of living expense needs in fixed income such as US Treasuries, maybe some corporate bonds mixed in. I want some things in there that are short term.
So I don't want like thirty year bonds in my fixed income portfolio. Now it's just me. I'm not saying you should or shouldn't do that. That's just my thought on it because I'm gonna own something for, I don't know, thirty years, might as well own stocks for thirty years. Right?
That's likely going to outpace fixed income. At least it has historically. Not saying it will in the future, so don't take this as investment advice. But what we're trying to do here is build out a a way to create income in the short term without having to sell bucket number three, which is our stock bucket. Now if we have a 30% downturn years one, two, three, or four retirement, and you've got to sell that to create income because that's all you have, well, that's a problem.
That sequence of return risk, right, and that's eating away way too much of your portfolio very quickly. That will create a big issue long term. You likely would run out of money in that scenario unless you cut back on spending dramatically. So by doing this, what you're doing is you're covering the short term buckets one and two, and you're covering the long term, the twenty year, time period away from now, by investing in those equities, that stock bucket, that number three. The purpose of bucket number three is to beat inflation.
So what you're doing is you are beating the odds by saying, I'm not gonna be too conservative. I'm not gonna be too aggressive. I'm actually finding a portfolio that's not even a rule of thumb either. I'm gonna talk about this here in number eight. I'm not even just saying, hey, I'm gonna fifty fifty or a sixty forty or an eighty twenty portfolio because that's what retirees should or shouldn't have.
What you're doing is is you're creating an allocation in a portfolio based on your specific income needs, which means it's tailored to you. So number three, don't invest too conservatively out of fear. I want you to invest with intention based on your specific circumstances. The fourth mistake is also related to investing and it's whenever you are not using asset location correctly. Now, what does this mean?
Well, three different account types. I've talked about this in other episodes, but typically you've got tax deferred, like IRAs or four zero one ks. You've got Roth, like Roth IRA and Roth four zero one ks, then you have taxable, like a brokerage account, whether you have that as an individual or maybe you have a jointly owned brokerage account. But those are the three typical accounts you could have. Obviously, there's others out there.
But from a taxation standpoint, those are the three big ones. So what you've got is, is you've got different accounts that operate differently from a tax perspective. Now, you've also got investments. You've got cash, you've got money market, you've got bonds, you've got stocks that pay dividends, and, you have capital gain opportunities perhaps. All of these different instruments of investing, they are taxed in different ways based on the type of instrument they are.
So you've got cash, bonds, any sort of fixed income products. Those will always pay taxes on the interest or the dividends if they're like a a bond ETF or a bond mutual fund. They're gonna pay a tax on that as normal income regardless of the account type it's in or anything else. Because of the investment it is, it will pay taxes on that as normal income. Now, your stocks, whether they're mutual funds or ETFs or individually owned stocks, they are going to have the opportunity to have what's called long term capital gains, meaning you sold the investment after you've held it for at least one year, it might qualify for long term capital gains, which is a lower tax rate than normal income.
That's an advantage. Great. Now you also have perhaps qualified dividends whenever you think about, the stock side of things. You could have dividends that are qualified, which means they also, benefit from that lower overall tax rate compared to normal income. So whenever you think about the account type itself and the investments and how each of those two things are taxed, typically what you wanna do is align those as best you possibly can so that they are most tax efficient.
For example, you wouldn't want to hold a bunch of bonds in your Roth IRA. Why not, Jacob? Well, your Roth IRA, the big benefit of it is that you get tax free growth, which means you probably want to hold things that grow in that account. So bonds typically don't grow in value. They're designed to kind of spit off income and give you, some some sort of stability from an income standpoint.
They're not designed to grow in value. So maybe you'd wanna have equities or stocks in that particular account so that you can use it to its advantage. Now you think about your brokerage account. Sometimes I call this a taxable account because it does pay taxes every year. You're gonna get a $10.99 every year from that account as you have dividends, interest, or capital gains realized.
And whenever you have this account, typically, you want to keep those dividends, those interest amounts, and any other capital gains. You wanna keep those to a minimum if you can, which means if at all possible, you might want to hold those stocks as well in that brokerage account as much as possible compared to only fixed income, bonds, cash, or otherwise. Because again, those stocks or those equity holdings, they can receive qualified dividend treatment and capital gain or long term capital gain treatment, which means you can pay lower taxes on that, and typically stocks are lower income generating compared to bonds or cash or any sort of fixed income product. So I know that can't be done a 100% the way you'd like because typically you have to have some sort of cash or some sort of short term reserve that's in a brokerage account or in your savings account, which, you know, you will pay income taxes on as you receive interest from it, but as much as possible, maybe think about holding those higher growth assets within the brokerage account as well. And then your traditional or tax deferred accounts like your IRA and four zero one ks, since those will always have distributions pay tax as normal income, maybe think about having income generating things as much as possible within that account type.
That's where you want your your bonds, your CD ladders, anything you've got. If you can hold those income producing investments, hold those in the traditional or tax deferred accounts so that you're actually, again, aligning the investment type with the account type. So that's asset location. Now, here's what I see most of the time. Most of the time people have, let's say, a sixty forty portfolio and it's sixty forty across every account type.
Well, that's not helpful because that means your Roth's not growing to its maximum potential, it means you're probably paying more taxes on your brokerage account every year because the bonds are the fixed income that are in that account type. So think about this and look at how this is structured currently within your portfolio, and if you can, start making strategic moves and decisions around this to optimize your investments from a tax perspective every single year. The fifth mistake that I commonly see is whenever someone takes Social Security too early, simply so that they can get what they can while they can, or perhaps even to take it, get the get the benefits, and then invest those proceeds. Now, the problem here is multifaceted and there's maybe a whole episode to do on this because it's more than just what you're getting or not getting. But in general, we all know that if you take your benefits early, you're getting a reduced benefit.
So if you live longer, that means your benefits are reduced for that much longer. Also, whenever you think about how your taxes work on Social Security, if you have to pull more income out of your tax deferred IRAs or other accounts, you could end up forcing more of your Social Security benefits to become taxable because you have to pull other income to supplement your benefits from other accounts like that IRA. If you just wait, maybe whenever you do take your benefits, if you take it at full retirement age or perhaps even beyond, your benefits are so much higher that actually you need less from your portfolio, which reduces the overall amount of tax you're going to pay on those Social Security benefits. And not to mention other things like Roth conversions and the fact that whenever you want to do a Roth conversion, typically you wanna do that in years in which you have the lowest amount of income. Now, if you've got Social Security coming in, that's already gonna take up probably your standard deduction, perhaps your the start or even all of your 10% tax bracket when that's where you'd want to be converting dollars.
You wanna use your Roth conversions for those lowest brackets if possible, rather than have other income filling up those brackets. This is why people like to wait until after they retire and stop earning an income to do those conversions during a period we might call your gap years at the retirement tax valley. This period of time, your tax rate is a lot lower, so that's when you wanna do conversions. If you take Social Security early to start getting some sort of income and, you know, trying to get what you can while you're still alive or before Social Security runs out, well, what you're doing is you're shooting yourself in the foot because now you can't convert as much at those low tax rates. You might have to jump into that 22 or 24% bracket.
So really consider Social Security as a part of your entire plan. You can't go tunnel vision on it and think about it in a silo. You've gotta look at the full picture and say, what is the right decision for me and my situation, not just how do I just get income and I want to start my Social Security now because I don't know when it's not going to be here anymore. It's like, well, okay, maybe you're right, but what is that going to do in terms of harming the other parts of your plan? So number five, mistake I see is taking Social Security too early without considering everything else within the plan.
The fifth mistake that I see is whenever people are saying, Jacob, I'm doing Roth conversions. I'm doing great. Thank you for all the recommendations to do Roth conversions. And And what they're actually doing is they're forcing them, and they otherwise shouldn't be doing them. Because what ends up happening here is you listen to people like me and, you know, anybody else that says Roth conversions might be helpful.
What I want you to do is I want you to take what we're talking about there with Roth conversions and understand it is not a silver bullet. It is not a surefire way to reduce your taxes. In fact, you're guaranteeing that you're going to increase your taxes this year by doing them for the greater good, hopefully, of lowering your lifetime tax bill. Okay? So if that lifetime tax bill, if you've run the projections and it would not be lowered by doing a Roth conversion, then you might not need to do a Roth conversion.
So whenever I hear someone saying, Jake, I'm doing the Roth conversion. I'm gonna do finish them all out, you know, within three years, the first three years of retirement, it's like, maybe we should press the brakes on that just a little bit and understand what we're really doing and why that actually might not be the right solution for you given the fact that at all times, you're gonna have a standard deduction, which means you're gonna be wasting your lowest brackets later in life if you don't have any tax deferred money left. So to convert everything, first of all, is a bad decision. But to force those conversions, because you listen to someone like me who talks about Roth conversions, is a mistake because you would likely end up paying taxes unnecessarily simply because it's the cool thing to do. You've heard this buzzword around Roth conversions, and yes, they can be powerful in the right scenarios, but you have to know if your situation is that right scenario.
That's where the big picture planning comes into play to say, hey, what if I do this conversion? Am I actually gonna benefit from it or not? And if I'm not, I probably shouldn't do it, but I need to know the path from an income perspective to make sure I don't get killed in taxes later on, especially once those RMDs kick in. So number six, forcing Roth conversions unnecessarily because you heard me or anyone else say it's awesome and a cool thing to do. Roth conversions can absolutely be helpful, but they might not be right for you.
You gotta check your situation. The seventh mistake is whenever someone comes to me and says, Jacob, I don't have any kids or I don't care if my kids get any of my money. I don't really plan to leave them anything. So therefore, I don't need an estate plan. And what I've learned about estate planning is this.
Everybody has an estate plan. It's either good or it's terrible. And so if you say, hey, don't want to leave anybody any money one day, that's not at all the point of an estate plan. The point of estate plan is to actually create a structure around all of your assets so that they transfer to whoever might be behind you in an orderly fashion. And an estate plan can be multifaceted.
It can be both before you pass away if you become incapacitated. Think about things like powers of attorney for financial or health care, but also think about post death whenever you might need a will or a trust or anything beyond that to say how do these assets move to the next generation. So even if you don't want to leave money or assets to your kids or heirs, I've got some news for you. You don't get to choose when you run out of money or when you spend it all. You might not ever get there.
So in many ways, this is a contingency plan as well so that you don't leave your loved ones with a big mess to go unravel and figure out and perhaps a really high tax bill as well. So it's your job. It's my job to create an estate plan for our families and whoever is behind us so that we don't leave them with a mess once we're not here anymore. So the seventh mistake is not having an estate plan because you think you're either not worthy of one, maybe you don't have enough money for one, or you just don't intend to leave money to anybody. That doesn't mean you shouldn't have one.
You have to get your affairs in order so that if and when you do pass unexpectedly or before you thought you would, everything flows smoothly to either your your family or charities or whoever you want your assets to go to one day. And the eighth and final mistake that I see is whenever people come to me and say, Jacob, I'm doing this, this, and this. And all those things are rules of thumb. Things like, hey, Jacob, I've got my portfolio figured out. It's gonna be $60.40 because that's retirees.
That's what we do. And I'm gonna spend 4% of my nest egg every single, you know, year following the 4% rule. And I'm gonna I'm gonna spend my brokerage account first and my IRA second and my Roth last. All these things are rules of thumb. They're cookie cutter.
And guess what? They're wrong. Why? Because your situation is different. Everybody's situation is different.
All these things at best, these different rules of thumb are are starting places at best. And guess what? They won't work for you because your situation needs to be tailored to you. Maybe you would pull from the brokerage account first if you're doing those Roth conversions, or maybe if you're not needing to do Roth conversions, perhaps you follow an income stacking approach where you use your IRA, your brokerage account, and perhaps even your Roth earlier than expected in a strategic way to maybe qualify for those ACA subsidies, maybe pay no tax on any of your income, maybe avoid Irma if you're if you're 65. All of these things have to be adjusted and tailored to you.
Think about the 4% rule. It's not even a rule. It's just a mathematical equation. You know, if you spend 4% of your money adjusted for inflation, you won't run out for thirty years. That's fine.
But again, if we know that you're likely not gonna spend more money every single year in perpetuity, the 4% rule might not allow you to spend as much money early on in retirement during your go go years as you otherwise would like to or be able to. So following that rule could restrict you from actually enjoying life while you have the opportunity. And again, if we follow a standard portfolio of sixty forty, that's what retirees do, well, we might be missing out on opportunity for returns. We might be overly conservative or too aggressive. We have to actually evaluate your situation and your specific needs and build a portfolio around that.
So, again, whenever I see someone following these rules of thumbs or these, you know, cookie cutter advice, that is a mistake because, again, the only thing I know about those different things is that they were wrong for your situation. So these different mistakes, these are things that I see as a retirement planner, someone who builds retirement plans and helps people just like you execute them month after month, year after year throughout retirement. This is what I see, and I want you to avoid these if you can. So if you're someone who's like, Jacob, all of that makes sense. I also don't know how to fit all of that together.
I think I need someone to help me. Great. You can reach out to us. You can apply to work with us here at River Tree. There's a link down in the description below if you wanna do that.
If not, you can take all these things, do it yourself, and go enjoy the retirement of your dreams. So thank you so much for tuning in to this week's episode of Retirement Answers. Again, my name is Jacob Duke. We'll 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 in to this week's episode. I look forward to talking with you again next week.