December 27, 2024 Best of Simply Money Podcast
Unraveling the Essentials of Financial Planning: 7 Key Components
On this week’s Best of Simply Money podcast, Amy and Steve delve into the crucial elements of crafting a successful financial plan. This episode breaks down the seven major components necessary for a robust retirement strategy, starting with determining your retirement income needs. Learn how to account for expenses that disappear post-retirement and understand the phases of the go-go, slow-go, and no-go years.
Discover effective debt management tactics aimed at ensuring a stress-free retirement. With insightful discussions on tax planning, Amy and Steve emphasize the importance of organizing your accounts for optimal tax efficiency, including strategies like Roth conversions and tax loss harvesting. Investment management also takes center stage, providing a comprehensive look at risk management and maximizing portfolio returns to ensure your financial plan supports your desired lifestyle.
The episode further explores essential aspects of estate planning, offering guidance on avoiding probate and ensuring your legacy is intact. Additionally, it highlights the significance of maintaining diversified income sources throughout retirement, ensuring flexibility and tax advantages. Tune in to learn how a well-rounded financial plan can secure your financial future while allowing you to enjoy your retirement years to the fullest.
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Transcript
Amy: Tonight, you know, we throw this out there on the show almost every night. We would say you need a financial plan, but what does a proper financial plan actually look like? We're going to break it down for you tonight. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. This is the bread-and-butter stuff of what we do all day, every day, with the investors that we work with, right? We talk about the fact that you need a financial plan, but we would say there's actually seven major components of that plan. You check all these boxes, and you're probably in pretty good shape.
Steve: Yeah, so we're going to go through that list today, starting with retirement income needs. The way that we come up with that number for the folks that we work with anyways, is we back out...we look at your income, your gross income, and then we back out expenses such as taxes, your savings that you're currently putting into retirement accounts and savings accounts, and those costs that will go away once you retire, such as commuting costs, there's others, to figure out kind of that starting point for what you are going to need to replace when you make a transition into retirement.
Now, I will say that this is just a starting point because oftentimes, when someone transitions into retirement, we're entering what I call our go-go years of retirement, where you want to get out and do things and maybe travel. There's oftentimes added expenses that fall off the longer you get into retirement and you enter your slow-go years of retirement, where you start to slow down. So, you know, it's starting...
Amy: I like that go-go and slow-go. That makes a lot of sense. And I...
Steve: There's also no go. That's where you just yell at kids to get off your lawn, and you're not doing anything anymore.
Amy: Don't do that. Don't do that part.
Steve: Don't do that.
Amy: You know, when we talk about this, though, what you need to be able to cover, first of all, we're making an assumption, right, that you are currently covering with your current income what you need. But then I also think you're making a great point, and there's a lot of research out there that I've seen that says most people actually assume that you're going to spend less when you're retired than when you're working. I guess if you're eating lunch at Jeff Ruby's every day with your colleagues, maybe.
When I think about it, Monday through Friday, when I'm working, I spend very little money. On the weekends, when I have more free time, that's when I spend money. And when all of your time is essentially that free time, you're going to spend more. You're going to travel more or golf more if you play golf or spend time with the grandkids. And the grandkids aren't cheap, right? So I like that you kind of break it down into the phases of retirement, because it's not like when you retire, for the next 30 years, you're going to be spending exactly the same amount every year. That's not at all what you're going to deal with.
Steve: Yeah, not even close. So, the next thing that we talk about in financial planning is your debt management. So, a key point to consider is debt is a shackle. It can hinder your ability to experience joy when you constantly have debt looming over your head. So, in a perfect world, as we transition into retirement, we simply have none. We plan accordingly to make sure that our mortgage is paid off, for example, once we make that transition into retirement.
Now, I'm not saying that you have to be debt-free when you retire, because financial planning is fluid, it's different, it meets you where you are based on your financial situation, your needs, your goals. Maybe it's just not an option. But in a perfect world, we plan accordingly up until retirement to be debt-free once we make that transition.
Amy: Money not going out is the same as money coming in. If you pay off that mortgage, you're essentially giving yourself a raise. There are certain circumstances where, hey, if you do get to retirement and you do have a mortgage, it might make more sense to refinance and lower those payments and stretch it out over a longer amount of time. But most of the time, we would say as a general rule, regardless of how old you are, when you are thinking about retirement, a plan to pay off any debt that you have before retirement is just going to be a really great one. And it's going to be a lot less stressful, and you're probably going to have a lot more peace of mind when it comes to retirement.
Another component of this, we would say, the seven personal decision points that you have to make when you're thinking about retiring is tax planning. Last week, I met with an investor, and this guy was a do-it-yourselfer. He and his wife had been doing it by themselves for years. They had a pension. They had some money in a Roth account and some money in a traditional 401(k). This is where I really think that while he had been going it alone on the savings part, what he needed help with was, okay, now we're out planning distributions. For many people, when you think about taxes, you think about April, tax preparation. Now, we're talking about tax planning, working with someone that can help you pull money out of your accounts in a certain order. I'm telling you, you get it right, you're saving money. You get it wrong, and you're paying hundreds, if not thousands, of dollars to the government that you don't need to, that's absolutely unnecessary.
Steve: Tax planning, the way that I talk about it is that it is finding ways to poke Uncle Sam in the eye with a stick.
Amy: Sign me up for that.
Steve: That's what we're looking at doing here. A self-directed investor, maybe they have a great process for how they build their investment portfolios. They've been doing it for a while. They're comfortable with it. But when you make that transition into retirement, tax planning becomes that much more important because it is a way to save money in retirement. So there's conversations around Roth conversions, for example. Let's say you have a lot of pre-tax money. You have a million-dollar 401(k). By the time you're 75 taking required minimum distributions, maybe it's worth $2 million. Now you're taking massive distributions because Uncle Sam is forcing you to via required minimum distributions.
But if we plan accordingly, we can pay some of those taxes now so that we can subject those dollars to tax-free gains and create a pool of money via Roth that is not subject to required minimum distributions. There's qualified charitable distributions. That's where you give your RMD directly to charity. There's gifting to children. There's tax-loss harvesting. There's a lot of moving parts when it comes to tax planning. The financial planning dork in me gets a lot of joy out of finding these ways to help folks I work with save money through efficient tax planning.
Amy: Yeah. Pays to work with a money nerd, right? I mean, some of these things...
Steve: Yeah. Thank you.
Amy: ...can make a huge difference. You're listening to "Simply Money..."
Steve: You just called me a nerd.
Amy: Of course, I did. I've been waiting to call you that for a long time. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby, our resident money nerd, in a really good way, right? Because you work hard to save the investors you work with money when it comes to taxes.
Steve: I take it as a compliment.
Amy: Well, and this can be a really nuance. I mean, I don't know that the average person is going to know how to take full advantage of tax-loss harvesting, for example. We're talking about the moving parts that it comes to, hey, there's seven major things when we talk about a financial plan. We think that having a financial plan is critical to manage your money, to manage your stress around your money. We're just talking through the components of those, as whether you're 22, 32, 62, 72, it doesn't matter. If you have all these things covered, you're going to be in great shape. One of those is, of course, figuring out how much you're going to need to spend in retirement, right? Paying down debt so that you're in a better place. We're talking about tax planning. So three things.
Now we're coming to number four, and I want to point this out. This is number four on our list, investment management. The reason why I'm saying this is number four on our list is because a lot of people, when you think about working with an advisor, you think about investing, what you zero in on is returns, right? What kind of returns can you get me? I'm going to jump from advisor to advisor to try to get the best returns. We would say that's really not even the largest part of what you think about when we think about an investment plan.
Steve: There's a lot of different methodologies for building portfolios, but at the end of the day, the markets are rather efficient. So, when casting a large net using low-cost ETFs and making sure that you have the right exposure to different asset classes, your stocks, your bonds, we can narrow that down much further. But I think it's important to highlight that investment management is essentially the building block to your fund...the building blocks to your financial plan. Your financial plan is the blueprint. Obviously, the more building blocks you have, the more robust blueprint you can have. We want to make sure that, at the end of the day, your money lasts longer than you do, and you're living the life that you have prepared to live. We want you to enjoy yourself in retirement. So investment management is an important piece of your overall financial plan.
But again, it's not number one on the list because when we build a financial plan, and when certified financial planners and other advisors build financial plans, we use that to determine the risk you need to take to meet your goals that you can afford to take based on your financial situation. And then questionnaires and getting to know you a little bit can highlight the level of risk that you're comfortable taking. Obviously, an important part of the financial plan, but it's not the only thing because, at the end of the day, the goal really is to make sure that your net worth is protected while continuing to grow year over year.
Amy: I was going to say, if you ask most people what their major goals are when it comes to money, if you're just going to boil it down, it's to grow your money and then protect it, right? And that risk management part is a big part of that protection. And that looks like a number of things, right? We walk people through a risk management, a risk tolerance questionnaire to say, okay, how much risk can you take and still sleep at night? That's one part of it. Another part of it is the insurance part of it, right? If you are still working and you still have kids at home, what kind of life insurance do you need for most people? That looks like term insurance, but there's definitely exceptions to that.
If you're coaching a kid's basketball team, if you have a trampoline or a pool in your yard, do you have an umbrella policy, right? Those can be incredibly cheap and give you, you know, a million dollars worth of coverage. If something were to go really sideways, right, really haywire, you have that additional protections. So these are critical conversations. And I would say these are foundational, right, to financial planning to make sure that not only if you're being smart and putting money into that 401(k), but how do you best protect the money as you grow it and protect your family at the same time?
Steve: And if we're focusing on the long term, also looking at long-term care, when do we do that? When is it appropriate? Is it something that you even need? These are questions that are answered through the financial planning process, which we're talking about today. Estate planning and legacy planning. Honestly, a bit of a bummer conversation, but it's...
Amy: Nobody's favorite.
Steve: Yeah. It's extremely important. I mean, this is something that it doesn't matter what age you are, you need to prepare your estate in a way that avoids probate. That's the goal at the end of the day, because probate is a public process where people have insight into the money movement that's happening. That's not something that I want to have happen if I were to pass prematurely. So having a will, having power of attorney set up, maybe a trust if you need one in that situation. It's typically for those that have minor children, for those that have children from previous marriages. At the end of the day, it's an extremely important conversation that you need to be having at any stage in your life.
Amy: Then also looking at distribution and income sources. This is critical in retirement and in working up to retirement, making sure that you give yourself options by having money in different buckets, different tax treatments. Some of that money in Roth accounts, some of that in traditional tax-deferred accounts. Then we would say even brokerage accounts, give you some flexibility so that when you need to buy a car in retirement, you've got some flexibility as to where that money comes from, making you pay maybe less taxes to get that money out. Here's the Allworth advice. The people who live well throughout their retirement and leading up to it usually do so because they took initiative and worked with an expert to create a comprehensive plan. You can do this on your own. You just have to know how to handle all of these things.
Coming up next, a lesson on capital gains taxes, how to ensure you don't get nailed with them. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. If you miss our show one night, you don't have to miss a thing. We've got a daily podcast for you. Just search "Simply Money." It's right there on the iHeart app or wherever you get your podcasts. And coming up, everybody's favorite game of a little retirement fact or fiction. Even if it's not your favorite, I bet you're going to learn a little something.
Steve: It's my favorite, Amy. I like it.
Amy: It's Steve Ruby's favorite, so it doesn't matter about anyone else, right? You love it, so we all love it. One thing we can also all love is when you check your portfolio and you see some big gains in there. The problem is then you realize Uncle Sam has to get his cut. And one of those ways that he takes that cut is capital gains taxes. This is one of those things. It's like a very double-edged sword, right? If you don't understand how this works, you can really penalize yourself. And if you do understand how this works, you can really use capital gains taxes to your advantage.
Steve: Yeah. So capital gains taxes refer to profits that you make from buying an asset at one price and selling it at a higher price. This is not inside of an IRA or a 401(k). Those are tax-deferred retirement savings vehicles. This would be like an after-tax brokerage account, for example. All capital gains, like any profits that you experience, they're going to be subject to taxes.
Now, capital gains taxes, let's say if you bought a stock at $10 and it was worth $20 and you sold it at that price, just one share, you have $10 of capital gains taxes. Long-term capital gains exist when you've held that position for more than one year. Short-term capital gains, if it was less than a year.
Amy: In short-term is what you need to understand the difference. Because if you've held that asset for less than a year, you're going to pay your regular tax rate, right? If you're in the 25...
Steve: Ordinary income taxes.
Amy: Yes, your regular income tax level. If you're in the 25% tax bracket, you're going to pay 25% of it. $250 out of that $10 in profit is going to Uncle Sam. But if you hold that asset and then decide to sell it after a year, and this is the key, then that money is taxed at long-term capital gains, which... And this is, listen, like a thumbnail kind of rule, but often it can be almost half of what you would pay in a regular income tax rate, right? These brackets for long-term capital gains are much lower. In fact, there's a threshold where you can sell that and not pay a dime in taxes if you are below a certain income level.
Steve: Exactly. So the highest tax rate possible, and this is for 2024, these are the numbers that just came out for long-term capital gains at this point, is 20%. So this is a big deal because if you have an expense and you are looking at taking a distribution from your accounts, you have a taxable account. A lot of times in this area, in Cincinnati, these assets come from Procter & Gamble shares that were maybe inherited from somebody in your family, and now you have them in a taxable brokerage account. They have a cost basis that was received at the date of death for who you inherited that account from, which establishes that tax basis to calculate the capital gains.
If you're making a decision on where to pull from and you have shares that are long-term capital gains, then you can leverage that to perhaps save money in taxes through that distribution.
Amy: Yeah. And I think where this really can make a ton of sense, and I would say everyone, we call them taxable accounts, and it's a terrible word.
Steve: I know, right? That's what it is.
Amy: Because it's like, oh, no one wants to pay taxes, but if we call them a brokerage account, and I don't know, it sounds really like highfalutin, but at the same time, we would say, hey, this is a really good thing to have because it does give you some flexibility, especially if you hold onto these assets for longer than a year. When you get to retirement, if you have to buy a car, right, say, and you decide you're going to buy a $40,000 car, well, if you're pulling that money out of a tax-deferred account, so you're really proud of yourself because you've got $100,000 in a traditional 401(k). Well, you're going to have to take more than $40,000 out because you're going to have to pay taxes on that money. If you have an IRA account, right, you've already paid the taxes on that money, but if you have a brokerage account, you're going to pay less in taxes on that money. So it just gives you a lot of flexibility.
And I would say, you know, when we talk about 401(k)s and we talk about IRAs, that's money that you're penalized if you touch that money before you're 59 and a half, right? This brokerage account, you've got a kid that's getting married, you're helping him pay for college, anything like that. You know, we would say, hey, if at all possible, you hold the assets in that for at least a year to take advantage of those capital gains, but all kinds of flexibility with these kinds of accounts. And so I say, that's why you've really got to understand how capital gains taxes work, because they can really work to your advantage.
Steve: And it's not just these types of accounts, either. Not to add a level of confusion here, but anything that's a capital asset is subject to the tax. That could be...
Amy: Like a house.
Steve: Yeah, it could be your house. It could be real estate, cryptocurrency even, jewelry, coin collections. There's capital gains taxes when you make a sale on this. So those capital gain rates, again, we want to highlight for 2024, the long term... Remember, your short-term gains are based on your ordinary income. Long-term capital gains rates for 2024 is anywhere between 0%, 15%, or 20%. The higher your income goes, the more capital gains, long-term capital gains taxes that you pay. The rate for 20% is anybody making above, you ready for this? Half million dollars, $551,000.
Amy: Right. Who those people...
Steve: That's a lot of money.
Amy: Well, with that example, though, Steve, those people are like in the, what, 39 or 37 percentile, you know, regular ordinary income tax bracket. So they're literally paying half at that 20%. So you can see where this is a huge advantage. One thing I want to mention, because you mentioned real estate, you know, I don't want people to get like indigestion, being like, oh, we're going to sell a house and we're going to make a profit on it. What are we going to have to pay? There is a bit of a difference when it comes to real estate where you're living in that house. And this is if you're a couple. If you make less than $500,000 on that, you don't have to pay any capital gains tax on the sale of your home.
Steve: If you're married, filing jointly.
Amy: If you're married, filing jointly. If you're an individual, then it's a $250,000 gain. I mean, if you're making that much money on the sale of a house, you're in pretty good shape. But I just want you to know, you know, there are some exemptions when it comes to the real estate.
Steve: You also have to have lived in the house for two of the previous five years in order for that to come to fruition.
Amy: So I think it's just a really good concept to be able to understand, maybe a little more advanced concept. But when you really want to make sure that you are making every dollar count, understanding how capital gains works can go a long way. Here's the Allworth advice. There's always ways to legally minimize that tax burden. So working with a qualified tax professional or understanding these things yourself can really help you do that. Coming up next, if you're disciplined while you're working, why you might want to continue that into retirement. We'll explain. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. When you're working, I think you have to have some level of discipline in your days. I mean, I know, Steve, the way that I run mine is I have maybe 20 seconds of margin between each thing that I need to do. Right? You have to be incredibly disciplined just to juggle all the balls and get all the things done. And I think for many of us, it's like, gosh, you can't look...you can't wait until you retire when you feel like you don't have to live life that way. And it does give you all kinds of freedom and flexibility. But I would say that I have seen some people take it too far, right? And they're completely undisciplined in retirement. And that can actually be a really bad thing for you as well.
Steve: Yeah. That type of thing can lead to complacency in retirement, which can ultimately shorten your retirement when you think about it. This is where you hear horror stories about people making that transition to retirement. They're bored. They're not doing anything. They just sit around. They waste away. That's a terrible thought. That's scary. That's scary for a lot of folks. Why do people lose their discipline? I mean, ultimately, it's kind of human nature when you're no longer tied to that schedule where you're going to work every day. And just like you talking about, you know, you have 20 seconds in between your next thing that you have to do during the workday. It can be a little bit alluring just to, I don't know, sleep in, take it easy. But is that healthy at the end of the day?
Amy: Well, I think that's what we look at, maybe a year into retirement. The retirees who have done it really well, they continue to maintain some kind of structure in their lives. Now, it doesn't have to be the crazy, hectic, go, go, go life that you had maybe when you were working. But I think about some friends of mine who, you know, had been married before and divorced, but had been dating for a really long time. And the man was getting ready to retire, and he'd had a really, really structured, really demanding job. He worked out every day.
I mean, he really like every minute was very well managed. So he couldn't wait until he retired. And when he did, well, he quit working out and he started drinking a lot. And then he, you know, wouldn't show up to things on time. He was really all over the place. And it ended up ending that relationship that they had had, which was a great relationship for years. And it was because he went from like, when you watch a pendulum swing from one end of that to the very opposite one. After a few years of retirement, he did kind of get it back together, but he lost a relationship that really mattered to him. And that might be extreme example of this. But I think you do have to maintain kind of some level of normalcy.
Steve: Yeah, I mean, there's a dangerous ripple effect that you're kind of talking about here. If you're not maintaining some level of discipline, not having hobbies, not sticking to some kind of a schedule, you know, I'm going to work out on Monday, Wednesday, Friday, for example, you know, keeping active, going for walks, that type of thing. Health is a big issue for those making that transition to retirement, because if you become complacent, you adopt poor habits, that's where that ripple effect can come in and that can affect relationships, for example.
Amy: Well, it can affect relationships, but also money, right? When you talk about health declining, it means more money out of your pocket on health care costs. And so I think that maintaining, right, eating well, not drinking a lot more than you did before, you know, the regular exercise that you're talking about Monday, Wednesday, Friday, or walks or whatever, that can go a long way to pushing off some costs in retirement that maybe you would have if you weren't so disciplined.
Steve: Yeah, it's a great point. And, you know, when it comes to relationships, obviously, when we're in the office or we're doing our job for years, it's camaraderie. You have relationships, you have people that you've grown close to at work. When you retire and they're still working, what do you do? You need to make sure that you have a full schedule to some capacity here, because, you know, the people that you've grown close to and that you've been close with for all these years, they're going to the office still. You need to find a way to fill your time. It all ties together here, back to discipline. So when you're just sitting around and you're sleeping in, you're not working out, that can cause some real problems.
Amy: I'm really close to my aunt, who retired maybe two or three years ago now. And she'd worked super hard for years and years and years. She was really excited and ready to retire. But even with that, she found that transition to be a lot more difficult than she thought. It took her several months just to develop a routine, right, walking her dog at certain times of the day, spending these days with grandkids, getting regular time together, you know, socially to have some lunches and some happy hours with people that she used to work with. But at first, even though she was really excited about it, it was a bit disappointing because it was like, gosh, what do I do with all this time?
When you're used to a nine-to-five or whatever your workday looks like, really hectic schedule, it can be a really difficult transition. And going from go, go, go to no go at all can be really difficult. So I'd say, you know, give yourself a few months when you retire to come up with a really good routine that works for you. But some level of discipline has to be part of that and also just a good attitude, right? I've seen people who, you know, thought retirement was going to be great and they were really disappointed, and they became cynical and unhappy. And frankly, they weren't fun to be around.
Steve: Well, it doesn't sound like a great retirement at all, does it?
Amy: No. Do not sign me up for that kind of retirement.
Steve: We've had segments on this in the past where we've had conversations around making sure that you have a system in place. You have hobbies. You have a social network, a support network that can keep you busy and keep you active. Steve Sprovach, great example of that. You know, I gave him a hard time on the air together, but...
Amy: We all did.
Steve: Yeah. I mean, he had his ducks in a row. He flies his airplane. He has grandchildren that he visits all the time in Michigan and Arizona. But he has his home base here, where he's staying busy working on a car. So, having some kind of structure when you're no longer busy every single day with work, getting your hobbies in order so that you are going to continue that and stay busy when you actually make the transition to retirement, it's extremely important.
Amy: You know what I think is really difficult about this? For most of us, the kind of discipline that we have during our work lives is kind of predetermined for us by our work, right?
Steve: Yeah, that's a good point.
Amy: How many meetings we have a day. Or whatever that work looks like, you just kind of fall into a natural rhythm that makes it easier to be efficient in that work. When you retire, when you transition to not that kind of schedule anymore, that kind of routine is on you. And I think that can be difficult because it was always kind of decided for you while you were working. So figuring out, okay, here's four or five things that are really important for me in retirement. Getting regular workouts. Okay, what does that look like? Does that look, you know, you schedule 30-minute walks once a day or something like that? Okay, social life. And then you're reaching out to maybe kids or grandkids or, you know, friends to make sure that you've got that kind of interaction. But it's kind of...the onus is on you. And that's going to feel a lot different, I think, than when you were working.
Here's the Allworth advice. You know, attitude is everything. So having an attitude of gratitude and writing it out through retirement, having some discipline, having a plan can go a long way. Coming up next, put your thinking caps on. We're playing retirement fact or fiction. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. If you've got a financial question you like us to help you figure out, there's a red button you can click on while you're listening to the show. It's right there on the iHeart app. Record your question. It's coming straight to us. We'd love to help you figure it out. And straight ahead, generic versus name brand, the kinds of things that make sense to save on by buying generic and the kinds of things that are worth paying the extra money and buying the brand name. We'll get into that. For now, though, it's time to play a little retirement fact or fiction. Here's the first one for you, Steve. Fact or fiction? An investment's bucket strategy is a sound one.
Steve: Yeah, I'll say sure, fact. That's fine. So, this is where you have different buckets to pull from and perhaps different investment strategies for those different buckets. So what I mean by that is your short-term, your intermediate, your long-term investments, if we work backwards Roth, that's kind of the last money you're ever going to spend. So taking a much more aggressive approach with those dollars, as far as the investments are concerned, is usually fine as long as you're not going to have some kind of an emotional reaction and sell when the markets are down.
Your intermediate investments, IRAs, for example, maybe a brokerage account, this is stuff that you're pulling from potentially, but might not need to take big distributions from because you have a short-term bucket, which is your cash, your CDs, your treasuries, something that's way more protected, but also more liquid. It gives you options to choose from as far as where to pull from to make tax-efficient decisions, but also gives you the ability with a larger pool of low-risk... low-reward assets to protect against downturns for your higher-risk assets.
Amy: I'm a very visual person. You can tell me a concept, but if I can picture it, I'm going to get it that much better. And I think that's one of the reasons why I like the bucket strategy is you're literally you can picture different buckets of money that have different kind of tax treatments, different sort of goals for them. If you're helping your kids save for college, if you're helping to pay for a wedding, if you've got a big vacation coming up, okay, that's going to have... That's going to go into a different bucket than if you're 15 years away from retirement and you're saving money in your 401(k), right? So, it's just kind of bucketing off that money for different uses. You know, thinking about your retirement in that way, I think, can give you a lot more flexibility. Here's another one for you. Fact or fiction. Annuities are perfect for people who want guaranteed income.
Steve: Okay. So, I'll give it to you the way that this question is phrased. Sure, it can be fact. I'm not terrified of annuities. I don't hate annuities. They can be perfect who want guaranteed income, but buyer beware. That's the key. There are situations where you can be oversold on annuity solutions that have all kinds of riders that you don't necessarily need. There can be massive commissions. You can be tied up in that solution, which is an awful thing to find yourself in if you don't have portfolio assets to support that, to pull from, to keep up with inflation. So, it can be because of that guaranteed income. That's the key. There is no other way to get guaranteed income unless you have a pension, Social Security, or you purchase an annuity because it is a hybrid insurance, hybrid investment product.
Amy: I think of this sweet man who used to come to all of these workshops that we had several years ago. He would... Literally, if we had one in March, he'd be there in March. If we had one in May, he'd be there in May. And he would raise his hand at the end when we would have a Q&A session, and he would always ask the same question. I've worked really hard for this money. I have saved it. Where can I put it where I'm not going to lose any of it and it's going to have gains? It doesn't exist. And he would come back two months later. It doesn't exist. But for someone like him, an annuity where he puts that money in, he knows it is safe. It's not going anywhere. He's going to get a set predetermined amount every month.
If you are like him, if you identify with that, that can make a lot of sense. The problem with annuities is you often don't get to take advantage of the full upside of the markets, right? And so you're kind of locking in that guaranteed money, but you're also maybe missing out on some options, which for some people can make you sleep better at night. And that's just fine. So I think that can be a fact. It really, though, depends on yourself. And I would say, listen, fully understand that annuity right before you buy it and know that you are buying an annuity. You're not investing in it. It's a product that you're buying. Here's the next fact or fiction. Taking a lump sum pension payment is usually a better decision than taking monthly or even yearly payments.
Steve: This one has too many variables. It really does, because that lump sum payment, you know, let's say longevity is not on your side. You know something that you don't want to know. You have a time frame. You know, a doctor has given you bad news. Why would you annuitize when that money will go away when you're gone? In that situation, you take a lump sum, and that money stays with your family, part of your legacy. You can put beneficiaries on it when you roll it to an IRA.
You know, situations where longevity is on your side. You already have portfolio assets. Let's say you're married. You have a spouse. They're younger than you and you want to annuitize and leave a survivor benefit. That could be very lucrative if you live for a long time and then they live for a long time as well. That's more money that you may never get back if you had rolled into an IRA. So this one has a lot of variables. This is one where you need to sit down with a fiduciary financial planner and crunch the numbers as they pertain to your individual current situation.
Amy: If you are at home right now, get up, walk to the nearest mirror and look at yourself. And this is a like you got to look at yourself for real and ask yourself, okay, if I was to get a lump sum, would I be responsible with that money or would I blow it? And I think this is a kind of know-yourself situation because we've seen, you know, many people take that lump sum payout and then, oh, I don't know, that's a lot of money. We've always wanted to go to Europe, and we kind of need a new car, and we were going to get a used car. But now we got this money. It's a brand new one. And all of a sudden, that money that's supposed to last you, right, for X number of years is starting to dwindle. And that can be a terrible thing.
If you're looking at yourself in the mirror and you're saying, actually, I know I'm pretty responsible with money and you run the numbers and you're going to take that money out and reinvest it yourself, you might actually come out ahead. So I really think this is a kind of know-yourself situation. And if you can't be super responsible with that money, monthly payouts where you know that check has to last for a month and then beyond that, you got to wait for the next one to come in, can be a really good thing. Here's one that I think we get pretty often. Fact or fiction, with the future of Social Security being so uncertain, should I put together a financial plan that doesn't even include it?
Steve: Fiction. But if you want to, sure. That's the short of it, because when you build a financial plan, you can put in whatever variables you want. We can remove an income source in retirement, such as Social Security. But the way that it is now, in 2033, if Congress doesn't step up to the plate and work together as one team, then we won't get into that. But if that were to happen, then Social Security benefits would be reduced. They wouldn't go away. You would get a lower amount.
Amy: Yeah, about 75%, right, as it's generally 70% to 75% of that promise. So, you know, I think probably the most responsible thing is to run that number because no one wants to just, you know, definitely think Congress is going to come through. One never knows what's going to happen in Washington. So I like running the numbers with the 75%. But beyond that, you don't have to run numbers with a zero. If you like that and you feel better about it, and your plan still works, well, then good for you.
Coming up next, when buying generic is the way to go and when it isn't. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. Steve, do you do the grocery shopping ever in your house?
Steve: Not even close. No, not a chance. We've talked... Spro and I have talked about this. If I get sent to the grocery store, I come back with really stupid things that are not part of the budget. Like, there was a heavily discounted old bag of snow crab, and I was like, oh, I got to get that. No, that's not something that we needed. So, this is something that we need to defer to my wife to make good decisions on because I'll buy the things that I want because I'm hungry.
Amy: All right. For those of you who are the ones who go to the grocery store, not Steve Ruby, listen up. You know, especially with inflation over the past few years, I think it forced some people to look at generic brands that maybe never did before. And I know we made the switch on several things. I started shopping at ALDI's a lot, and it's all generic brand stuff. And my kids don't notice a difference. But there are some things we would say that you would notice the difference on.
So, if you were going to switch to generic, here's a few things to switch on. Cereal. I went to the grocery store last week. There's a box of cereal that my kids normally eat was like $6 for a box of cereal. I might even just pull the bag out of the generic one and put it in the normal box so that they don't know the difference.
Steve: No, never know the difference.
Amy: Because the box looks the same. It tastes the same. They're not going to notice the difference. So that's one thing that you can save on. Spices and seasonings. I'm telling you, you will not notice any difference on these. And spices can be incredibly expensive.
Steve: Do your children know that you're lying to them?
Amy: I am just making smart decisions for them. Someday, someday I will do the big reveal and say, these have not actually been fruity pebbles this all.
Steve: When they're out on their own, you're going to say, you've been eating the generic brand.
Amy: Yes.
Steve: And that's what you've grown used to. So here's a good way to save money moving forward.
Amy: When they head off to college, there will be a big reveal. Until then, I'm going to save money, and they'll never know the difference. And, you know, unless they listen to the show, which, let's face it, they're probably not going to do that. Baking supplies, also a good thing to save money on, incredibly expensive. And if you really like to bake, you're not going to notice any difference there. When we would...
Steve: [crosstalk 00:37:48] name brand better.
Amy: When we would say brand name is better, toilet paper. Funny story about this. When I was in college, my sophomore year, we got a house off campus, and everyone kind of took turns, right, buying the milk and the toilet paper and kind of the main supplies that everyone would use. Well, when it come...
Steve: You bought the ALDI toilet paper.
Amy: We didn't know ALDI's then. But when it came to my turn to buy toilet paper, I was like, I don't have much money. I'm buying the generic. Nobody in the house spoke to me for a week. They were so... It was like, no, no, no, no, you do not save money on the toilet paper. You can buy the generic milk, but not the toilet paper. So don't do that.
Steve: Well, other things would be batteries, name brand, major electronics, and pet food actually, because it can actually be way more healthy for your animals.
Amy: Yeah. So I think knowing when to buy the generic and when not to can make a huge difference. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station.
Steve: Yeah, so we're going to go through that list today, starting with retirement income needs. The way that we come up with that number for the folks that we work with anyways, is we back out...we look at your income, your gross income, and then we back out expenses such as taxes, your savings that you're currently putting into retirement accounts and savings accounts, and those costs that will go away once you retire, such as commuting costs, there's others, to figure out kind of that starting point for what you are going to need to replace when you make a transition into retirement.
Now, I will say that this is just a starting point because oftentimes, when someone transitions into retirement, we're entering what I call our go-go years of retirement, where you want to get out and do things and maybe travel. There's oftentimes added expenses that fall off the longer you get into retirement and you enter your slow-go years of retirement, where you start to slow down. So, you know, it's starting...
Amy: I like that go-go and slow-go. That makes a lot of sense. And I...
Steve: There's also no go. That's where you just yell at kids to get off your lawn, and you're not doing anything anymore.
Amy: Don't do that. Don't do that part.
Steve: Don't do that.
Amy: You know, when we talk about this, though, what you need to be able to cover, first of all, we're making an assumption, right, that you are currently covering with your current income what you need. But then I also think you're making a great point, and there's a lot of research out there that I've seen that says most people actually assume that you're going to spend less when you're retired than when you're working. I guess if you're eating lunch at Jeff Ruby's every day with your colleagues, maybe.
When I think about it, Monday through Friday, when I'm working, I spend very little money. On the weekends, when I have more free time, that's when I spend money. And when all of your time is essentially that free time, you're going to spend more. You're going to travel more or golf more if you play golf or spend time with the grandkids. And the grandkids aren't cheap, right? So I like that you kind of break it down into the phases of retirement, because it's not like when you retire, for the next 30 years, you're going to be spending exactly the same amount every year. That's not at all what you're going to deal with.
Steve: Yeah, not even close. So, the next thing that we talk about in financial planning is your debt management. So, a key point to consider is debt is a shackle. It can hinder your ability to experience joy when you constantly have debt looming over your head. So, in a perfect world, as we transition into retirement, we simply have none. We plan accordingly to make sure that our mortgage is paid off, for example, once we make that transition into retirement.
Now, I'm not saying that you have to be debt-free when you retire, because financial planning is fluid, it's different, it meets you where you are based on your financial situation, your needs, your goals. Maybe it's just not an option. But in a perfect world, we plan accordingly up until retirement to be debt-free once we make that transition.
Amy: Money not going out is the same as money coming in. If you pay off that mortgage, you're essentially giving yourself a raise. There are certain circumstances where, hey, if you do get to retirement and you do have a mortgage, it might make more sense to refinance and lower those payments and stretch it out over a longer amount of time. But most of the time, we would say as a general rule, regardless of how old you are, when you are thinking about retirement, a plan to pay off any debt that you have before retirement is just going to be a really great one. And it's going to be a lot less stressful, and you're probably going to have a lot more peace of mind when it comes to retirement.
Another component of this, we would say, the seven personal decision points that you have to make when you're thinking about retiring is tax planning. Last week, I met with an investor, and this guy was a do-it-yourselfer. He and his wife had been doing it by themselves for years. They had a pension. They had some money in a Roth account and some money in a traditional 401(k). This is where I really think that while he had been going it alone on the savings part, what he needed help with was, okay, now we're out planning distributions. For many people, when you think about taxes, you think about April, tax preparation. Now, we're talking about tax planning, working with someone that can help you pull money out of your accounts in a certain order. I'm telling you, you get it right, you're saving money. You get it wrong, and you're paying hundreds, if not thousands, of dollars to the government that you don't need to, that's absolutely unnecessary.
Steve: Tax planning, the way that I talk about it is that it is finding ways to poke Uncle Sam in the eye with a stick.
Amy: Sign me up for that.
Steve: That's what we're looking at doing here. A self-directed investor, maybe they have a great process for how they build their investment portfolios. They've been doing it for a while. They're comfortable with it. But when you make that transition into retirement, tax planning becomes that much more important because it is a way to save money in retirement. So there's conversations around Roth conversions, for example. Let's say you have a lot of pre-tax money. You have a million-dollar 401(k). By the time you're 75 taking required minimum distributions, maybe it's worth $2 million. Now you're taking massive distributions because Uncle Sam is forcing you to via required minimum distributions.
But if we plan accordingly, we can pay some of those taxes now so that we can subject those dollars to tax-free gains and create a pool of money via Roth that is not subject to required minimum distributions. There's qualified charitable distributions. That's where you give your RMD directly to charity. There's gifting to children. There's tax-loss harvesting. There's a lot of moving parts when it comes to tax planning. The financial planning dork in me gets a lot of joy out of finding these ways to help folks I work with save money through efficient tax planning.
Amy: Yeah. Pays to work with a money nerd, right? I mean, some of these things...
Steve: Yeah. Thank you.
Amy: ...can make a huge difference. You're listening to "Simply Money..."
Steve: You just called me a nerd.
Amy: Of course, I did. I've been waiting to call you that for a long time. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby, our resident money nerd, in a really good way, right? Because you work hard to save the investors you work with money when it comes to taxes.
Steve: I take it as a compliment.
Amy: Well, and this can be a really nuance. I mean, I don't know that the average person is going to know how to take full advantage of tax-loss harvesting, for example. We're talking about the moving parts that it comes to, hey, there's seven major things when we talk about a financial plan. We think that having a financial plan is critical to manage your money, to manage your stress around your money. We're just talking through the components of those, as whether you're 22, 32, 62, 72, it doesn't matter. If you have all these things covered, you're going to be in great shape. One of those is, of course, figuring out how much you're going to need to spend in retirement, right? Paying down debt so that you're in a better place. We're talking about tax planning. So three things.
Now we're coming to number four, and I want to point this out. This is number four on our list, investment management. The reason why I'm saying this is number four on our list is because a lot of people, when you think about working with an advisor, you think about investing, what you zero in on is returns, right? What kind of returns can you get me? I'm going to jump from advisor to advisor to try to get the best returns. We would say that's really not even the largest part of what you think about when we think about an investment plan.
Steve: There's a lot of different methodologies for building portfolios, but at the end of the day, the markets are rather efficient. So, when casting a large net using low-cost ETFs and making sure that you have the right exposure to different asset classes, your stocks, your bonds, we can narrow that down much further. But I think it's important to highlight that investment management is essentially the building block to your fund...the building blocks to your financial plan. Your financial plan is the blueprint. Obviously, the more building blocks you have, the more robust blueprint you can have. We want to make sure that, at the end of the day, your money lasts longer than you do, and you're living the life that you have prepared to live. We want you to enjoy yourself in retirement. So investment management is an important piece of your overall financial plan.
But again, it's not number one on the list because when we build a financial plan, and when certified financial planners and other advisors build financial plans, we use that to determine the risk you need to take to meet your goals that you can afford to take based on your financial situation. And then questionnaires and getting to know you a little bit can highlight the level of risk that you're comfortable taking. Obviously, an important part of the financial plan, but it's not the only thing because, at the end of the day, the goal really is to make sure that your net worth is protected while continuing to grow year over year.
Amy: I was going to say, if you ask most people what their major goals are when it comes to money, if you're just going to boil it down, it's to grow your money and then protect it, right? And that risk management part is a big part of that protection. And that looks like a number of things, right? We walk people through a risk management, a risk tolerance questionnaire to say, okay, how much risk can you take and still sleep at night? That's one part of it. Another part of it is the insurance part of it, right? If you are still working and you still have kids at home, what kind of life insurance do you need for most people? That looks like term insurance, but there's definitely exceptions to that.
If you're coaching a kid's basketball team, if you have a trampoline or a pool in your yard, do you have an umbrella policy, right? Those can be incredibly cheap and give you, you know, a million dollars worth of coverage. If something were to go really sideways, right, really haywire, you have that additional protections. So these are critical conversations. And I would say these are foundational, right, to financial planning to make sure that not only if you're being smart and putting money into that 401(k), but how do you best protect the money as you grow it and protect your family at the same time?
Steve: And if we're focusing on the long term, also looking at long-term care, when do we do that? When is it appropriate? Is it something that you even need? These are questions that are answered through the financial planning process, which we're talking about today. Estate planning and legacy planning. Honestly, a bit of a bummer conversation, but it's...
Amy: Nobody's favorite.
Steve: Yeah. It's extremely important. I mean, this is something that it doesn't matter what age you are, you need to prepare your estate in a way that avoids probate. That's the goal at the end of the day, because probate is a public process where people have insight into the money movement that's happening. That's not something that I want to have happen if I were to pass prematurely. So having a will, having power of attorney set up, maybe a trust if you need one in that situation. It's typically for those that have minor children, for those that have children from previous marriages. At the end of the day, it's an extremely important conversation that you need to be having at any stage in your life.
Amy: Then also looking at distribution and income sources. This is critical in retirement and in working up to retirement, making sure that you give yourself options by having money in different buckets, different tax treatments. Some of that money in Roth accounts, some of that in traditional tax-deferred accounts. Then we would say even brokerage accounts, give you some flexibility so that when you need to buy a car in retirement, you've got some flexibility as to where that money comes from, making you pay maybe less taxes to get that money out. Here's the Allworth advice. The people who live well throughout their retirement and leading up to it usually do so because they took initiative and worked with an expert to create a comprehensive plan. You can do this on your own. You just have to know how to handle all of these things.
Coming up next, a lesson on capital gains taxes, how to ensure you don't get nailed with them. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. If you miss our show one night, you don't have to miss a thing. We've got a daily podcast for you. Just search "Simply Money." It's right there on the iHeart app or wherever you get your podcasts. And coming up, everybody's favorite game of a little retirement fact or fiction. Even if it's not your favorite, I bet you're going to learn a little something.
Steve: It's my favorite, Amy. I like it.
Amy: It's Steve Ruby's favorite, so it doesn't matter about anyone else, right? You love it, so we all love it. One thing we can also all love is when you check your portfolio and you see some big gains in there. The problem is then you realize Uncle Sam has to get his cut. And one of those ways that he takes that cut is capital gains taxes. This is one of those things. It's like a very double-edged sword, right? If you don't understand how this works, you can really penalize yourself. And if you do understand how this works, you can really use capital gains taxes to your advantage.
Steve: Yeah. So capital gains taxes refer to profits that you make from buying an asset at one price and selling it at a higher price. This is not inside of an IRA or a 401(k). Those are tax-deferred retirement savings vehicles. This would be like an after-tax brokerage account, for example. All capital gains, like any profits that you experience, they're going to be subject to taxes.
Now, capital gains taxes, let's say if you bought a stock at $10 and it was worth $20 and you sold it at that price, just one share, you have $10 of capital gains taxes. Long-term capital gains exist when you've held that position for more than one year. Short-term capital gains, if it was less than a year.
Amy: In short-term is what you need to understand the difference. Because if you've held that asset for less than a year, you're going to pay your regular tax rate, right? If you're in the 25...
Steve: Ordinary income taxes.
Amy: Yes, your regular income tax level. If you're in the 25% tax bracket, you're going to pay 25% of it. $250 out of that $10 in profit is going to Uncle Sam. But if you hold that asset and then decide to sell it after a year, and this is the key, then that money is taxed at long-term capital gains, which... And this is, listen, like a thumbnail kind of rule, but often it can be almost half of what you would pay in a regular income tax rate, right? These brackets for long-term capital gains are much lower. In fact, there's a threshold where you can sell that and not pay a dime in taxes if you are below a certain income level.
Steve: Exactly. So the highest tax rate possible, and this is for 2024, these are the numbers that just came out for long-term capital gains at this point, is 20%. So this is a big deal because if you have an expense and you are looking at taking a distribution from your accounts, you have a taxable account. A lot of times in this area, in Cincinnati, these assets come from Procter & Gamble shares that were maybe inherited from somebody in your family, and now you have them in a taxable brokerage account. They have a cost basis that was received at the date of death for who you inherited that account from, which establishes that tax basis to calculate the capital gains.
If you're making a decision on where to pull from and you have shares that are long-term capital gains, then you can leverage that to perhaps save money in taxes through that distribution.
Amy: Yeah. And I think where this really can make a ton of sense, and I would say everyone, we call them taxable accounts, and it's a terrible word.
Steve: I know, right? That's what it is.
Amy: Because it's like, oh, no one wants to pay taxes, but if we call them a brokerage account, and I don't know, it sounds really like highfalutin, but at the same time, we would say, hey, this is a really good thing to have because it does give you some flexibility, especially if you hold onto these assets for longer than a year. When you get to retirement, if you have to buy a car, right, say, and you decide you're going to buy a $40,000 car, well, if you're pulling that money out of a tax-deferred account, so you're really proud of yourself because you've got $100,000 in a traditional 401(k). Well, you're going to have to take more than $40,000 out because you're going to have to pay taxes on that money. If you have an IRA account, right, you've already paid the taxes on that money, but if you have a brokerage account, you're going to pay less in taxes on that money. So it just gives you a lot of flexibility.
And I would say, you know, when we talk about 401(k)s and we talk about IRAs, that's money that you're penalized if you touch that money before you're 59 and a half, right? This brokerage account, you've got a kid that's getting married, you're helping him pay for college, anything like that. You know, we would say, hey, if at all possible, you hold the assets in that for at least a year to take advantage of those capital gains, but all kinds of flexibility with these kinds of accounts. And so I say, that's why you've really got to understand how capital gains taxes work, because they can really work to your advantage.
Steve: And it's not just these types of accounts, either. Not to add a level of confusion here, but anything that's a capital asset is subject to the tax. That could be...
Amy: Like a house.
Steve: Yeah, it could be your house. It could be real estate, cryptocurrency even, jewelry, coin collections. There's capital gains taxes when you make a sale on this. So those capital gain rates, again, we want to highlight for 2024, the long term... Remember, your short-term gains are based on your ordinary income. Long-term capital gains rates for 2024 is anywhere between 0%, 15%, or 20%. The higher your income goes, the more capital gains, long-term capital gains taxes that you pay. The rate for 20% is anybody making above, you ready for this? Half million dollars, $551,000.
Amy: Right. Who those people...
Steve: That's a lot of money.
Amy: Well, with that example, though, Steve, those people are like in the, what, 39 or 37 percentile, you know, regular ordinary income tax bracket. So they're literally paying half at that 20%. So you can see where this is a huge advantage. One thing I want to mention, because you mentioned real estate, you know, I don't want people to get like indigestion, being like, oh, we're going to sell a house and we're going to make a profit on it. What are we going to have to pay? There is a bit of a difference when it comes to real estate where you're living in that house. And this is if you're a couple. If you make less than $500,000 on that, you don't have to pay any capital gains tax on the sale of your home.
Steve: If you're married, filing jointly.
Amy: If you're married, filing jointly. If you're an individual, then it's a $250,000 gain. I mean, if you're making that much money on the sale of a house, you're in pretty good shape. But I just want you to know, you know, there are some exemptions when it comes to the real estate.
Steve: You also have to have lived in the house for two of the previous five years in order for that to come to fruition.
Amy: So I think it's just a really good concept to be able to understand, maybe a little more advanced concept. But when you really want to make sure that you are making every dollar count, understanding how capital gains works can go a long way. Here's the Allworth advice. There's always ways to legally minimize that tax burden. So working with a qualified tax professional or understanding these things yourself can really help you do that. Coming up next, if you're disciplined while you're working, why you might want to continue that into retirement. We'll explain. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. When you're working, I think you have to have some level of discipline in your days. I mean, I know, Steve, the way that I run mine is I have maybe 20 seconds of margin between each thing that I need to do. Right? You have to be incredibly disciplined just to juggle all the balls and get all the things done. And I think for many of us, it's like, gosh, you can't look...you can't wait until you retire when you feel like you don't have to live life that way. And it does give you all kinds of freedom and flexibility. But I would say that I have seen some people take it too far, right? And they're completely undisciplined in retirement. And that can actually be a really bad thing for you as well.
Steve: Yeah. That type of thing can lead to complacency in retirement, which can ultimately shorten your retirement when you think about it. This is where you hear horror stories about people making that transition to retirement. They're bored. They're not doing anything. They just sit around. They waste away. That's a terrible thought. That's scary. That's scary for a lot of folks. Why do people lose their discipline? I mean, ultimately, it's kind of human nature when you're no longer tied to that schedule where you're going to work every day. And just like you talking about, you know, you have 20 seconds in between your next thing that you have to do during the workday. It can be a little bit alluring just to, I don't know, sleep in, take it easy. But is that healthy at the end of the day?
Amy: Well, I think that's what we look at, maybe a year into retirement. The retirees who have done it really well, they continue to maintain some kind of structure in their lives. Now, it doesn't have to be the crazy, hectic, go, go, go life that you had maybe when you were working. But I think about some friends of mine who, you know, had been married before and divorced, but had been dating for a really long time. And the man was getting ready to retire, and he'd had a really, really structured, really demanding job. He worked out every day.
I mean, he really like every minute was very well managed. So he couldn't wait until he retired. And when he did, well, he quit working out and he started drinking a lot. And then he, you know, wouldn't show up to things on time. He was really all over the place. And it ended up ending that relationship that they had had, which was a great relationship for years. And it was because he went from like, when you watch a pendulum swing from one end of that to the very opposite one. After a few years of retirement, he did kind of get it back together, but he lost a relationship that really mattered to him. And that might be extreme example of this. But I think you do have to maintain kind of some level of normalcy.
Steve: Yeah, I mean, there's a dangerous ripple effect that you're kind of talking about here. If you're not maintaining some level of discipline, not having hobbies, not sticking to some kind of a schedule, you know, I'm going to work out on Monday, Wednesday, Friday, for example, you know, keeping active, going for walks, that type of thing. Health is a big issue for those making that transition to retirement, because if you become complacent, you adopt poor habits, that's where that ripple effect can come in and that can affect relationships, for example.
Amy: Well, it can affect relationships, but also money, right? When you talk about health declining, it means more money out of your pocket on health care costs. And so I think that maintaining, right, eating well, not drinking a lot more than you did before, you know, the regular exercise that you're talking about Monday, Wednesday, Friday, or walks or whatever, that can go a long way to pushing off some costs in retirement that maybe you would have if you weren't so disciplined.
Steve: Yeah, it's a great point. And, you know, when it comes to relationships, obviously, when we're in the office or we're doing our job for years, it's camaraderie. You have relationships, you have people that you've grown close to at work. When you retire and they're still working, what do you do? You need to make sure that you have a full schedule to some capacity here, because, you know, the people that you've grown close to and that you've been close with for all these years, they're going to the office still. You need to find a way to fill your time. It all ties together here, back to discipline. So when you're just sitting around and you're sleeping in, you're not working out, that can cause some real problems.
Amy: I'm really close to my aunt, who retired maybe two or three years ago now. And she'd worked super hard for years and years and years. She was really excited and ready to retire. But even with that, she found that transition to be a lot more difficult than she thought. It took her several months just to develop a routine, right, walking her dog at certain times of the day, spending these days with grandkids, getting regular time together, you know, socially to have some lunches and some happy hours with people that she used to work with. But at first, even though she was really excited about it, it was a bit disappointing because it was like, gosh, what do I do with all this time?
When you're used to a nine-to-five or whatever your workday looks like, really hectic schedule, it can be a really difficult transition. And going from go, go, go to no go at all can be really difficult. So I'd say, you know, give yourself a few months when you retire to come up with a really good routine that works for you. But some level of discipline has to be part of that and also just a good attitude, right? I've seen people who, you know, thought retirement was going to be great and they were really disappointed, and they became cynical and unhappy. And frankly, they weren't fun to be around.
Steve: Well, it doesn't sound like a great retirement at all, does it?
Amy: No. Do not sign me up for that kind of retirement.
Steve: We've had segments on this in the past where we've had conversations around making sure that you have a system in place. You have hobbies. You have a social network, a support network that can keep you busy and keep you active. Steve Sprovach, great example of that. You know, I gave him a hard time on the air together, but...
Amy: We all did.
Steve: Yeah. I mean, he had his ducks in a row. He flies his airplane. He has grandchildren that he visits all the time in Michigan and Arizona. But he has his home base here, where he's staying busy working on a car. So, having some kind of structure when you're no longer busy every single day with work, getting your hobbies in order so that you are going to continue that and stay busy when you actually make the transition to retirement, it's extremely important.
Amy: You know what I think is really difficult about this? For most of us, the kind of discipline that we have during our work lives is kind of predetermined for us by our work, right?
Steve: Yeah, that's a good point.
Amy: How many meetings we have a day. Or whatever that work looks like, you just kind of fall into a natural rhythm that makes it easier to be efficient in that work. When you retire, when you transition to not that kind of schedule anymore, that kind of routine is on you. And I think that can be difficult because it was always kind of decided for you while you were working. So figuring out, okay, here's four or five things that are really important for me in retirement. Getting regular workouts. Okay, what does that look like? Does that look, you know, you schedule 30-minute walks once a day or something like that? Okay, social life. And then you're reaching out to maybe kids or grandkids or, you know, friends to make sure that you've got that kind of interaction. But it's kind of...the onus is on you. And that's going to feel a lot different, I think, than when you were working.
Here's the Allworth advice. You know, attitude is everything. So having an attitude of gratitude and writing it out through retirement, having some discipline, having a plan can go a long way. Coming up next, put your thinking caps on. We're playing retirement fact or fiction. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. If you've got a financial question you like us to help you figure out, there's a red button you can click on while you're listening to the show. It's right there on the iHeart app. Record your question. It's coming straight to us. We'd love to help you figure it out. And straight ahead, generic versus name brand, the kinds of things that make sense to save on by buying generic and the kinds of things that are worth paying the extra money and buying the brand name. We'll get into that. For now, though, it's time to play a little retirement fact or fiction. Here's the first one for you, Steve. Fact or fiction? An investment's bucket strategy is a sound one.
Steve: Yeah, I'll say sure, fact. That's fine. So, this is where you have different buckets to pull from and perhaps different investment strategies for those different buckets. So what I mean by that is your short-term, your intermediate, your long-term investments, if we work backwards Roth, that's kind of the last money you're ever going to spend. So taking a much more aggressive approach with those dollars, as far as the investments are concerned, is usually fine as long as you're not going to have some kind of an emotional reaction and sell when the markets are down.
Your intermediate investments, IRAs, for example, maybe a brokerage account, this is stuff that you're pulling from potentially, but might not need to take big distributions from because you have a short-term bucket, which is your cash, your CDs, your treasuries, something that's way more protected, but also more liquid. It gives you options to choose from as far as where to pull from to make tax-efficient decisions, but also gives you the ability with a larger pool of low-risk... low-reward assets to protect against downturns for your higher-risk assets.
Amy: I'm a very visual person. You can tell me a concept, but if I can picture it, I'm going to get it that much better. And I think that's one of the reasons why I like the bucket strategy is you're literally you can picture different buckets of money that have different kind of tax treatments, different sort of goals for them. If you're helping your kids save for college, if you're helping to pay for a wedding, if you've got a big vacation coming up, okay, that's going to have... That's going to go into a different bucket than if you're 15 years away from retirement and you're saving money in your 401(k), right? So, it's just kind of bucketing off that money for different uses. You know, thinking about your retirement in that way, I think, can give you a lot more flexibility. Here's another one for you. Fact or fiction. Annuities are perfect for people who want guaranteed income.
Steve: Okay. So, I'll give it to you the way that this question is phrased. Sure, it can be fact. I'm not terrified of annuities. I don't hate annuities. They can be perfect who want guaranteed income, but buyer beware. That's the key. There are situations where you can be oversold on annuity solutions that have all kinds of riders that you don't necessarily need. There can be massive commissions. You can be tied up in that solution, which is an awful thing to find yourself in if you don't have portfolio assets to support that, to pull from, to keep up with inflation. So, it can be because of that guaranteed income. That's the key. There is no other way to get guaranteed income unless you have a pension, Social Security, or you purchase an annuity because it is a hybrid insurance, hybrid investment product.
Amy: I think of this sweet man who used to come to all of these workshops that we had several years ago. He would... Literally, if we had one in March, he'd be there in March. If we had one in May, he'd be there in May. And he would raise his hand at the end when we would have a Q&A session, and he would always ask the same question. I've worked really hard for this money. I have saved it. Where can I put it where I'm not going to lose any of it and it's going to have gains? It doesn't exist. And he would come back two months later. It doesn't exist. But for someone like him, an annuity where he puts that money in, he knows it is safe. It's not going anywhere. He's going to get a set predetermined amount every month.
If you are like him, if you identify with that, that can make a lot of sense. The problem with annuities is you often don't get to take advantage of the full upside of the markets, right? And so you're kind of locking in that guaranteed money, but you're also maybe missing out on some options, which for some people can make you sleep better at night. And that's just fine. So I think that can be a fact. It really, though, depends on yourself. And I would say, listen, fully understand that annuity right before you buy it and know that you are buying an annuity. You're not investing in it. It's a product that you're buying. Here's the next fact or fiction. Taking a lump sum pension payment is usually a better decision than taking monthly or even yearly payments.
Steve: This one has too many variables. It really does, because that lump sum payment, you know, let's say longevity is not on your side. You know something that you don't want to know. You have a time frame. You know, a doctor has given you bad news. Why would you annuitize when that money will go away when you're gone? In that situation, you take a lump sum, and that money stays with your family, part of your legacy. You can put beneficiaries on it when you roll it to an IRA.
You know, situations where longevity is on your side. You already have portfolio assets. Let's say you're married. You have a spouse. They're younger than you and you want to annuitize and leave a survivor benefit. That could be very lucrative if you live for a long time and then they live for a long time as well. That's more money that you may never get back if you had rolled into an IRA. So this one has a lot of variables. This is one where you need to sit down with a fiduciary financial planner and crunch the numbers as they pertain to your individual current situation.
Amy: If you are at home right now, get up, walk to the nearest mirror and look at yourself. And this is a like you got to look at yourself for real and ask yourself, okay, if I was to get a lump sum, would I be responsible with that money or would I blow it? And I think this is a kind of know-yourself situation because we've seen, you know, many people take that lump sum payout and then, oh, I don't know, that's a lot of money. We've always wanted to go to Europe, and we kind of need a new car, and we were going to get a used car. But now we got this money. It's a brand new one. And all of a sudden, that money that's supposed to last you, right, for X number of years is starting to dwindle. And that can be a terrible thing.
If you're looking at yourself in the mirror and you're saying, actually, I know I'm pretty responsible with money and you run the numbers and you're going to take that money out and reinvest it yourself, you might actually come out ahead. So I really think this is a kind of know-yourself situation. And if you can't be super responsible with that money, monthly payouts where you know that check has to last for a month and then beyond that, you got to wait for the next one to come in, can be a really good thing. Here's one that I think we get pretty often. Fact or fiction, with the future of Social Security being so uncertain, should I put together a financial plan that doesn't even include it?
Steve: Fiction. But if you want to, sure. That's the short of it, because when you build a financial plan, you can put in whatever variables you want. We can remove an income source in retirement, such as Social Security. But the way that it is now, in 2033, if Congress doesn't step up to the plate and work together as one team, then we won't get into that. But if that were to happen, then Social Security benefits would be reduced. They wouldn't go away. You would get a lower amount.
Amy: Yeah, about 75%, right, as it's generally 70% to 75% of that promise. So, you know, I think probably the most responsible thing is to run that number because no one wants to just, you know, definitely think Congress is going to come through. One never knows what's going to happen in Washington. So I like running the numbers with the 75%. But beyond that, you don't have to run numbers with a zero. If you like that and you feel better about it, and your plan still works, well, then good for you.
Coming up next, when buying generic is the way to go and when it isn't. You're listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station. You're listening to "Simply Money," presented by Allworth Financial. I'm Amy Wagner, along with Steve Ruby. Steve, do you do the grocery shopping ever in your house?
Steve: Not even close. No, not a chance. We've talked... Spro and I have talked about this. If I get sent to the grocery store, I come back with really stupid things that are not part of the budget. Like, there was a heavily discounted old bag of snow crab, and I was like, oh, I got to get that. No, that's not something that we needed. So, this is something that we need to defer to my wife to make good decisions on because I'll buy the things that I want because I'm hungry.
Amy: All right. For those of you who are the ones who go to the grocery store, not Steve Ruby, listen up. You know, especially with inflation over the past few years, I think it forced some people to look at generic brands that maybe never did before. And I know we made the switch on several things. I started shopping at ALDI's a lot, and it's all generic brand stuff. And my kids don't notice a difference. But there are some things we would say that you would notice the difference on.
So, if you were going to switch to generic, here's a few things to switch on. Cereal. I went to the grocery store last week. There's a box of cereal that my kids normally eat was like $6 for a box of cereal. I might even just pull the bag out of the generic one and put it in the normal box so that they don't know the difference.
Steve: No, never know the difference.
Amy: Because the box looks the same. It tastes the same. They're not going to notice the difference. So that's one thing that you can save on. Spices and seasonings. I'm telling you, you will not notice any difference on these. And spices can be incredibly expensive.
Steve: Do your children know that you're lying to them?
Amy: I am just making smart decisions for them. Someday, someday I will do the big reveal and say, these have not actually been fruity pebbles this all.
Steve: When they're out on their own, you're going to say, you've been eating the generic brand.
Amy: Yes.
Steve: And that's what you've grown used to. So here's a good way to save money moving forward.
Amy: When they head off to college, there will be a big reveal. Until then, I'm going to save money, and they'll never know the difference. And, you know, unless they listen to the show, which, let's face it, they're probably not going to do that. Baking supplies, also a good thing to save money on, incredibly expensive. And if you really like to bake, you're not going to notice any difference there. When we would...
Steve: [crosstalk 00:37:48] name brand better.
Amy: When we would say brand name is better, toilet paper. Funny story about this. When I was in college, my sophomore year, we got a house off campus, and everyone kind of took turns, right, buying the milk and the toilet paper and kind of the main supplies that everyone would use. Well, when it come...
Steve: You bought the ALDI toilet paper.
Amy: We didn't know ALDI's then. But when it came to my turn to buy toilet paper, I was like, I don't have much money. I'm buying the generic. Nobody in the house spoke to me for a week. They were so... It was like, no, no, no, no, you do not save money on the toilet paper. You can buy the generic milk, but not the toilet paper. So don't do that.
Steve: Well, other things would be batteries, name brand, major electronics, and pet food actually, because it can actually be way more healthy for your animals.
Amy: Yeah. So I think knowing when to buy the generic and when not to can make a huge difference. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial, here on 55KRC, THE TALK Station.
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