The Life You Want, On Your Terms: Discover Financial Flexibility
Is the traditional idea of retirement outdated? On this week’s Best of Simply Money podcast, Bob and Brian challenge the old-school dream of "never working again" and introduce a more dynamic vision: financial flexibility. Discover how shifting your mindset—and your financial strategy—can unlock purpose, passion, and peace of mind in your later years.
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Bob: Tonight, "Why Financial Flexibility is the New Financial Freedom." You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. We've all heard the American dream, save enough money so you never have to work again. But what if that's the wrong goal? Today, we're flipping that script because financial flexibility, Brian, might be the new American dream.
Brian: Yeah, so things have changed. Financial freedom used to be, "Here's my retirement date, and I'm going to mark all these Xs on the calendar until it's time to no longer go into the office ever again, and I'm just going to spend the rest of my life on a beach." But now people are feeling a little bit differently, and we hear this every day here at Allworth as we're sitting down with clients and prospective clients talking about financial planning.
And it's people who come in and they say, "You know, I thought I wanted to just do a bunch of nothing, but now I know, so I got family members, I got friends who have retired and have gone ahead of me." And sometimes they're just not as happy because they don't have that sense of purpose anymore. So people are thinking a little bit differently about something called financial flexibility.
So, you know, let's pretend you're a family with maybe $1 million to $5 million, and it might be a more realistic, fulfilling target here. Flexibility means you don't really have to stop working, you just choose how you work, when, and with whom. And a lot of times, this conversation comes in the form of, "Let's talk about what you might do when this particular job, this particular career, is no longer necessary."
Maybe you're not ready to completely hang it up and let the dust collect on you, but maybe it's time to seek a new job in a spot where it's not the salary that matters, and maybe it's not the benefits because you've already kind of won that game. But it might be something where you're still bringing a little bit of income to help bridge the gap during retirement, but you're not quite ready to completely hang it up and have no reason to get out of bed anymore.
Bob: Yeah, I'm finding... I'm having this discussion more and more with folks that are retiring today than I did with folks that I started working with 20 to 30 years ago. I agree. It used to be, "Hey, I'm 58, 59. Show me how I can get out of there now. I can't wait to get out of there and never go to work anymore." And that's not the case anymore. A lot of folks, even in their late 60s and 70s, they want a way to do something. They want to stay involved. They got a lot of experience and acquired wisdom and value to add to whether it's the company they worked for for 30 or 40 years, or nonprofits, or serve on ministry boards, anything like that. They just don't want to be chained to a 60 to 70-hour work schedule.
And I'm finding that companies and institutions are way more flexible than maybe they ever have before in allowing these folks to be involved and do some things because it really is a win-win for both parties. Are you finding that with any of your clients, Brian?
Brian: Yeah, absolutely. And one of the big companies around here that does this is General Electric. So they seem to be the gold standard.
Bob: That's exactly the company I'm thinking of.
Brian: Exactly.
Bob: Go ahead. Yeah.
Brian: There's a conga line of people who have their retirement dinner and then the very next week are coming back as a consultant or doing whatever they do. And that's just a well-worn path. It's almost... I can't remember the last time I had somebody tell me that they were ready to retire from General Electric and they had zero intent on taking that step.
It seems like a good move, though. Those seem to be some pretty happy people because they get to slough off some of the duties that they had before. They do feel entitled and able to say no to things, whereas when you're working and you're in the grind, when you're 30s, 40s, 50s, you're just part of the machine, and so forth. But those folks do seem to have a little more flexibility, and they do seem to be a little more relaxed. And it's a great baby step into retirement.
And I think that can be a great thing for anybody. Just the idea of, "You know what? I'm going to start to back off a little bit, rather than that cold water shock of, today I get out of bed, and I go for my last day of work, and then I have my retirement dinner, say goodbye to everybody, and then tomorrow, what am I going to do?" That can be a really, really scary thing. So these sort of baby steps into retirement can be very powerful.
Bob: Well, let's talk about a different way of maybe creating those baby steps into something else. And here's what I mean by that, Brian. We've just kind of talked about maybe the GE executive that work 50, 60 hours a week. They want to stay involved, but they want to do it on a 10 to 15 to 20-hour-a-week basis. We've got some other folks that say, "I want to make a complete different career path decision." Maybe I worked in IT or in engineering or what have you for 30 to 35 years. I want to open up a wood shop, or I want to work with orphan children in Zimbabwe. I want to do something like that. I'm seeing more and more of those conversations come up.
Let's talk about what we need to be doing as we think about those dreams and goals, and actually make it come into fruition or reality. What do we need to do in terms of planning and getting your finances in order?
Brian: Right. So what you're looking at there is if you want to be able to figure out what you can get away with here, first of all, you got to make sure that you understand your current situation, right? So you have a current budget, right, whatever it is. You may not be paying attention to it. You may not be putting money in envelopes or making sure that we only spend X at the grocery store or whatever, but you do have some kind of a lifestyle out there.
Presumably, if you are unaware of your budget, then you are either a very, very, very financially stable person, where you just know that you're bringing in more than you're spending, or you're a complete train wreck. So we'll assume that we're talking to the people who kind of have things on autopilot, and they're okay.
But you need to look really in depth at that to see what that actually is, because you got to figure out what is my minimum, what's a bare minimum I need to get going here? And a good, easy way to do that is to simply take a look at your take-home pay. You don't need to fill out a spreadsheet full of here's my magazine subscriptions and here's what we spend at Applebee's on the weekends and whatever. You can simply look at your take-home pay and figure out what's going where.
Top line is here's what hits the bank from all of our resources, from all of our income sources at the beginning of the month, and then here's where it goes. This goes to the mortgage. That'll be gone in two, three, however many years. We always carve out a little bit into savings. Maybe that's a goal you don't have to have anymore. This is going to college tuition or college savings right now. That's a finite goal, and so forth.
Once you knock off all those finite things that have a limited lifespan, then you will be down to the money you just spent to be you on a monthly basis. That is your target. Start with that and then figure out, how can I replicate that income from my existing sources? And therefore, here is a gap I need to make. And I can promise you, if you're one of these stable people, it's probably a lot less than you think it is. Most of the time, we come up with happy surprises in those discussions.
Bob: Yep. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. And Brian, this is where having a really sound tax strategy comes into play. And we talk about this often. This is where having different buckets or sources from which you can take income, diversified sources of income, IRAs, 401(k)s, after-tax accounts, Roth accounts, blending an income strategy from those different sources. That's where we can really create some nice tax efficiency of that gap income, as you call it, and then really make this thing home in the later years.
Brian: Yes. Now, this is where things get more complicated, right? So for people who have worked very hard and built their plans and created several different resources, right? You've got Social Security history. You've got pre-tax dollars in your 401(k), 403(b). You might have Roth in the mix. Maybe you've got some taxables, all this other stuff. Then everything gets harder when you hit a point where you've got a lot of resources. All those resources are labeled and painted differently with regard to taxes. They're all going to get taxed differently.
When we are working slaves, you're paying ordinary income taxes. That's it. You go to work. Somebody gives you a check. You're going to get taxed at the ordinary income rates. Period. End of story. When you've created all of these different resources, now you got a choice to make, and congratulations, things just got harder and Bob and Brian just got a little more job security because there are any number of ways you can combine these things into an income stream that will keep you stable, but each one of them is going to have its own pros and cons.
So let me throw out one thing, though, for somebody who is thinking about this. I want to make sure that everybody knows of something called the rule of 55. Remember the rule of 55, Bob?
Bob: Yes.
Brian: So what we do there...
Bob: I hate those rules because everybody is different. You can't apply this rule of whatever to everybody because everybody's situation is different. But I don't want to take you off-track.
Brian: That's okay. And I threw you a softball there, and I almost hit you in the helmet. Sorry about that. But no, the rule of 55, this one does apply to everybody, which is nothing more than when you are 55 years old, you get to pull money out of your 401(k) without paying penalties.
So if you are a person who is considering an earlier retirement and one of your resources is pre-tax dollars in your 401(k), then know that you can pull money from the 401(k) without only paying income taxes, no 10% penalty, no early withdrawal penalty.
That does not apply to IRA. You'll notice I said the word 401(k) six or seven times in that whole exchange there. The IRA age is 59.5. That's what most people think everything is. But if it's a 401(k), it's 55. You can draw on that without penalty.
Bob: Yeah. And let's not ignore the whole healthcare question, because what we're talking about here is these bridge years. If you want to retire early and transition into something else, and let's face it, if you go from a for-profit business into a nonprofit, a ministry, something like that, the benefits often are not as great and you got to sometimes self-insure yourself between when you retire from your company job and when you get to Medicare. We got to help people transition and get good, sound medical coverage, and sometimes people overlook that.
I heard of one lady yesterday who... I mean, she could work anywhere. She's brilliant, but she just decided to go work part-time at Costco, working in some department of Costco that sold widgets or garden equipment or something that she was really interested in, solely to get over there for about 10 hours a week, work part-time, but get healthcare coverage between her late 50s. And when she could go on Medicare, she's totally happy with her life. She goes in there, rolls in for her 10 hours a week. She does something completely different. She's out of there, but she's got that healthcare coverage and good healthcare coverage to bridge that gap to 65.
Brian: Yeah. And I think that's a great outcome. I want to throw out one caveat, something to keep in mind. And I'm going back to...this goes back 20, 30 years, when I first started in this industry, and Home Depot and Lowe's, the big box hardware stores, were kind of new. And there were a lot of...always tend to be older men who want to retire from my job. I love working with my hands, so I want to help people do that. That sounds like fun. So I'm going to go be an hourly guy at Home Depot and Lowe's. And you still see this every now and then.
But these are hardworking people who have their stuff together, and they will eventually recognize that, "Hey, this store isn't running as efficiently as it could. I'm going to fix it. I'm going to do things." And all of a sudden, management notices, and you get a promotion, and then that happens a couple of...three times. And all of a sudden, you have a new career that you didn't want. You only wanted to help people with their hardware projects a few hours a week. So just be careful of that trap.
Bob: That's good. Here's the Allworth advice. The question isn't when can I retire? It's when can I start living the life I want to live? Coming up next, why clinging to old investments might be the one thing holding your whole retirement plan back. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. You can listen the following morning, during your commute to work, or at the gym. Just search "Simply Money" on the iHeart app or wherever you find your podcasts.
Straight ahead at 6:43, the lessons you can learn from going into a retirement time machine. Brian, that's going to be kind of fun. All right. We see it all the time. Someone walks into our office with a portfolio they built over 20 or 30 years, and it's filled with all kinds of stuff, Brian. The stocks they love, mutual funds from their 401(k) days, maybe even some company shares from a past employer. And when we sit across the desk and ask them why they own these certain things, the answer is often, "Well, I've just always had it," or, "It's done well for me," or even, "It's part of my story." What do you say to those people, Brian?
Brian: You know, Bob, I'm going through this literally today and the other day and through this weekend, just in a slightly different area of life. And I'm referring to my garage. I have a lot of unfinished little projects out there that they're all sitting in the garage, about maybe 80%, 90% state of completion. And I'm sure whatever they are was important to me the day that I was working on it, but I've completely forgotten about it, and they're just kind of there.
And a lot of times, that's what happens to people, and frankly, that's what drives people in the door because eventually, they step way back and finally look at the forest instead of the individual trees, and they go, "What is all of this stuff? What does it mean to me?" And they realize, "I'm not even that interested really in maintaining this stuff anymore." And Bob, that defines me. I can't remember the last time I changed my oil in my lawnmower, but it still starts. The day that it doesn't start, I'll probably hire a professional. But anyway.
So yeah, people come in and they've got this grab bag of just stuff that they... Some of it they inherited, some of it they bought because they were interested in investing a while ago, or something like that, but they've never figured out exactly what role does all this money play when they're trying to knit it all together into something that can help them retire or accomplish their financial goal.
Bob: Yeah, the point we're trying to make here is your investment portfolio, it's not a scrapbook. It's not a half-rebuilt Harley-Davidson in your garage with a bunch of tools lying around, or a family photo album because dad, grandpa, mom used to work at this company and that's why we all own the stock, even though none of us pays attention to the company. And you do need to change the oil on your lawnmower, by the way, Brian.
Brian: Not yet. Not yet. I don't. It started this weekend, Bob.
Bob: Well, you'll be surprised when that day comes. All right. The point with this whole collection of investments is it is a tool, you know, it should be built to do a job. And if it's not doing that job anymore, meaning your consolidated, coordinated investment and tax strategy, it might be time to let some of those things go. And letting some of those components of your portfolio go, it doesn't mean you were wrong before. It just means you're evolving.
And we talk about, all the time, investments, this investment business. And particularly the tax benefits and tax opportunities around investing has changed and evolved dramatically over the last 10 to 15 years. And we find a lot of times, people aren't even aware that some of these strategies even exist.
Brian: Right. So let's take an example here. And I think having been in this industry, both of us here, Bob, for several decades now, one of the big stories in the stock market over the last several decades has been Apple. Throwing that as an example, because Apple's a great company, a strong company. They're not going away, but not quite the shining beacon that they once were. Steve Jobs is gone. Everybody has an iPhone. Things just don't seem to be innovating the way they used to.
But if you've owned Apple for a few decades, then you have a pretty good chunk of stock. And also, you probably have some notion that if you were to sell it, if it's in a taxable account, you were to sell it, you're going to pay taxes. Most people go, "Oh, I just can't sell because I'm going to have to pay taxes. I can't deal with that." Don't want to have to think about it.
Bob: Well, and then that whole portfolio attachment thing comes into play. And here's what I mean by that. I mean, we love staring at a statement or an online portfolio summary. And we love seeing that 400% gain every day. It proves to us emotionally that we were right. We bought a stock and it went up, and we made a bunch of money. And you sit there and stare at that big percentage gain and say, "This has done great for me. Why would I ever sell it?" I...you, but a lot of people don't look at what the performance of that nice stock position has done, maybe in the last three to five years, as opposed to a diversified portfolio. Do you ever find that?
Brian: I do. Absolutely. And I'll go back to my garage full of projects. Sometimes you have a statement full of projects that had a purpose at one point in your past. So really, I think the goal here is, okay, now you've got something. What are you going to do with it? So what could people do? Let's get into that, Bob.
So this is all money, right? These are all financial instruments, and they should somehow be supporting you. Otherwise, what was the point? So something you might think about if you've got these kind of assets out there, if you are charitably inclined and you've got appreciated stocks, then you should look into something called a donor-advised fund. You can donate those shares to a donor-advised fund. You will reap the benefits of a deduction, which you may not have anymore, right?
When the standard deduction became a lot larger, a lot of people lost the benefit of deducting charitable contributions. But this is a way a donor-advised fund would allow you to make a contribution now but not ultimately have the charity receive it until a time of your choosing. So you make an irrevocable deduction now, give it to the charity over the same two, three, four, or five years you would have intended anyway.
Bob: Especially if you're one of those folks that's still writing checks or putting currency into the offering plate at church, or writing a check to chosen charities, and you're not even able to take advantage of the much larger standard deduction for married couples. This is a miss that we find all the time. And it's great that people are giving money to charity, but there's just better ways to do it. And to your point, you can kind of scale out of that large, concentrated position and do it on a much more tax-efficient basis.
Another thing that we've talked about recently, and it's worth mentioning here again, is direct indexing. There are strategies where you can exchange that low-cost basis stock for a fully diversified portfolio of stocks and not have to take the tax hit. It's a wonderful strategy.
Brian: Yeah. And that's a way to... Again, you're putting diversification into your portfolio. So let's give a quick example. We're here in Cincinnati. So let's say one of us has a bunch of P&G stock. Another one of us has a bunch of GE. Another one has a bunch of Kroger, and keep adding to the list. Well, if we sell those because we want to diversify, then, yeah, we're going to incur capital gain because we sold the stock and took the gain.
However, if we all contribute in kind those shares to another fund and then we redistribute shares of that fund to ourselves, now we have a more diversified portfolio and no one has actually executed a sale resulting in a capital gain. So that's called an exchange fund, and it's another way to deal with the risk of a position that's got a little too big.
Bob: Yeah. So it comes down to when to reevaluate. And the way I look at this is we all have to ask ourselves, does this investment that I'm holding still align with my current needs? Is it helping me hit my long-term plan, or am I just holding it because I'm afraid to let it go, or I don't want to walk out into that garage and clean up all the stuff lying on the floor?
Brian: And you sound like my spouse, Bob.
Bob: I got one of those two. Hey, if you don't know the answer, that's the sign it's time for a review, whether it's an old mutual fund, a legacy annuity, or a chunk of employer stock. You owe it to yourself to reassess and reassess that with a good fiduciary advisor who can help you look at your various options.
Here's the Allworth advice. Your money isn't your identity. It's a tool to build the life you want today, tomorrow, and into retirement. Coming up next, it's the most emotional and most overlooked retirement decision. And we're going to get into it coming up next. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. We talk a lot about how to downsize your portfolio, but today, we want to talk about downsizing something far more emotional. And Brian, we run into this often with clients, the whole topic of downsizing your home.
Brian: Yeah. So this comes up in a lot of ways during financial planning. It comes up in a form of, you know, people will realize that, "You know what, do we want to be in this house anymore? The kids are up and out, and now it's just a bunch of bedrooms I got to clean," and that kind of thing.
But what I find, Bob, is frequently, people who have come to that conclusion will decide to move, and then they move into a house that is the same size. I think we get into our heads that, "Well, I've always lived in a five-bedroom house. That's just kind of what I need, which is, you know, I don't want to... It's too scary to go smaller." But then inevitably, we'll find people, you know, talking about how they bought too much house.
And heaven forbid, you know, a lot of times there winds up being a mortgage against it. Don't be one of those people who retires and then puts a 30-year mortgage in place for a bigger home that you're just going to fill with stuff that someday you're going to have to drag to goodwill.
Bob: Well, we also talk with families that are struggling with, hey, they deep down know that this big house that they raised their kids in and where they've got a ton of memories and it's been paid off for years and they kind of swore to each other they'd never leave the house, you know, they just feel like they can't leave because of all these memories. They want to have a place for their kids to come back, all good stuff. But sometimes those maintenance costs, taxes, upkeep, it just becomes a huge burden to them that prevents them from traveling and doing some other things that they might otherwise like to do if they didn't have this huge house to take care of.
Brian: And Bob, I think this is where some war stories from our financial planning tables here at Allworth can come in. And what I'm speaking about is when we've got, you know, the heirs of their parents, my mom and dad have passed away. It's time to settle the estate, and it's time for... Everybody has received their distributions. And the very first thing that they wind up talking about is, "We're going to get rid of this house. Mom and Dad were convinced that we wanted it. We just didn't. None of us, the siblings, nobody wanted this house because we've all got our own houses and we're happy where we are."
I think people tend to convince themselves that, "I have these warm, wonderful memories." And this isn't to take any of that away. That is important stuff. "But I have these warm, wonderful memories in this structure. Therefore, it must be maintained and passed down."
And your kids have those warm, wonderful memories, too, and they know it's important to you. They may not be being upfront with you as to whether they really want this house. Most of the time, one of the very first calls that happens during the settlement of an estate is a real estate agent, because we can't let that house sit empty. We got to deal with it. Something is going to go wrong with it if nobody is paying attention to it. And we're going to eat property taxes and expenses as long as we have it. So they're going to sell it relatively quickly. So make decisions based on that knowledge as you move forward on your own plan.
Bob: Well, the other thing to keep in mind, Brian, is the larger the house and the longer you've lived there. And my wife and I went through this personally about four years ago. The more accumulated crap you've got in that house, to use your garage and tool example, I mean, you stay in a house for 17, 18, 20 years. You raise a few kids there, and you got a whole bunch of stuff lying around in there that you don't need and nobody wants. And if you end up dying with that big house and all the crud that's in it, that can create a whole other set of burdens for your kids. How are we going to get rid of all this stuff?
Brian: Yeah. I always think back to seventh-grade chemistry over at St. Ignatius on there on the west side when I think about this, a gaseous element. One of the characteristics of a gaseous element is that it expands to fill the container it's in. And I got news for you, Bob. So do we. If I have a big house, I'm going to fill it with stuff I probably don't need, but I got the room for it, so why not?
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Let's get into taxes and numbers a little bit. Brian, what are some of the benefits, in addition to unburdening yourself with the huge house and all the stuff that's in it? Let's talk about tax planning opportunities if you decide to make a change.
Brian: Yeah. So one of the things that most people are comfortable with is the concept of, well, if I own something, anything, a stock, a mutual fund, collectibles, crypto, whatever, if I'm going to sell it at a gain, then the IRS is going to come sniffing around for some taxes. And that is true most of the time, but not in this case.
So if you're sitting on a house that has a good chunk of equity built into it, there are some rules you got to follow. But basically, the moment you downsize that home to a smaller house, you will have incurred a gain. You can always roll the gain forward when you're buying a bigger house. That's never a thing.
But when you are buying a smaller house, you get a one-time lifetime exemption where you can take up to a $250,000 gain if you're an individual, $0.5 million gain per couple, and you can avoid paying any capital gain taxes on that at all. And again, this is specific to a house. You have to have lived in it for two of the previous five years, right? There's no flipping a property here in the short term. Has to really be your house. And so there are some hoops you got to jump through there. But the point is, you can get out from under that home and avoid capital gain taxes.
Bob: Yeah. One more thing to throw out there if you're thinking... And we're not trying to sell people on liquidating their home. But a lot of times, people, I think they want to make a change. They just don't know how to go about it. You talked about the tax implications.
One other thing, just from an emotional and lifestyle standpoint, is test it out. Go rent something for 3 to 6 months or a year that might be in your wheelhouse or where you think you might want to live from a lifestyle standpoint and home standpoint and see how it works before you pull the trigger and buy something else or sell that home that you've been in for 20 years. Test it out. Make sure it's the right move, and then you're not going to regret your decision down the road.
Here's the Allworth advice. Your home has served your family, perhaps for decades. Now it's time to ask, is it still serving you? Coming up next, how a retirement time machine can keep you from making bad financial decisions. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you have a financial question you'd like for us to answer, well, there's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question, and it will come straight to us.
We all want to know what retirement will look like, but most of us are making choices today without fully understanding the future impact at all. What if you could climb into a time machine, Brian, and see the results of your decisions 15 to 20 years down the road? Wouldn't that be fun?
Brian: Yeah, this is really an important part of financial planning. So I think a lot of people get hung up on the idea that, "I can't predict the future. I don't know what's going to happen. Therefore, I shouldn't bother making any decisions right now." And that impacts things from, how much should I be saving in my 401(k)? When do I turn on my Social Security? Can we afford to take this big vacation or, you know, retire at a certain time or whatever? It's never about right now. Most people are able to make the decision that they want and do what their gut tells them they want to do right now. But we can't pull the trigger because we cannot see 15, 20 years into the future.
So let's go through some mathematical examples here to kind of help people understand what this is about. First, we'll take Mike. Mike is a young guy. He's established in his career, married, he's got a couple of kids, brings in $150,000 a year. Mike's big question. We get this all the time. Am I putting enough away in my 401(k)? And the answer to that is, well, what are you trying to accomplish with it? Are you one of these FIRE people, you know, Financial Independence, Retire Early? Well, then the answer is put as much as you can possibly afford and not mess up your current bills. Or are you somebody who wants to live a certain lifestyle? You're just trying to make sure you're putting away a minimum of enough.
So Mike right now is putting 10% into his 401(k). That's pretty average. That's pretty standard. We try to get everybody to double digits, and then you'll be in the ballpark of okay. But he's wondering, "Well, what if we sacrifice some things now, and instead of 10%, I put 20% in, and my pay drops, my take-home pay drops now, but at the same time, I'm putting away more money? So his original plan, Bob, if he's putting away 10% and we get a 7% annual return, right, that's kind of the Goldilocks zone. That's not too high, not too low. It's not unreasonable.
Bob: Good, balanced portfolio over a long term.
Brian: Exactly, yeah. It's not super risky.
Bob: Responsible return assumption.
Brian: Yeah. No, a 40-year-old guy could be more aggressive. That's a little bit of a different story. So we're just trying to keep the numbers simple. So if Mike does that, he works for 25 years, and now he's got roughly $900,000 in today's dollars, that's a nice pile. He's doing okay.
Bob: At age 65.
Brian: At age 65. So he's 40 now. We did this for 20 years. What's the difference? So he right now could generate about maybe a reliable $50,000 a year worth of income off of that on top of his... He'll have Social Security and some other things as well. And that's pretty good, but it might limit them. They maybe back off on the travel, or maybe there's not as much going to the grandkids, to the rest of the family.
So let's look at it again. Mike, who is, again, now 40, decides, you know what, let's forego some of the take-home pay. I'm going to bump to 20%. What does that result in? Now, putting 20% of his salary away for 25 years, now he's got $1.8 million. And this is just math. This is the snowball effect. The bigger the numbers, the larger the snowball gets. And this really starts to change the game because now we're talking $90,000 in sustainable retirement income. Again, that's in addition to Social Security. All that stuff, Bob, is back on the table. Retiring earlier, taking the bigger trips, helping the grandkids, all of it's back.
Bob: Well, and we need to talk about one thing, and I'm going back in time, you know, reverse time machine. Remember, Mike's 40, and he has 2 kids. Those two kids cost money. So Mike's probably right in the middle of travel, sports, music lessons, you know, ballet lessons, all that stuff. He's probably saying, "Yeah, Bob and Brian, it'd be great to put 20% of my income away, but I got bills, you know, to cover today." So it is a balancing act. It's easy for us to pull out a calculator and say, "Yep, you could have $1.8 billion if you save all this money."
I think the point we're trying to make is at least run some numbers and just don't hope all this works out at age 65, 70, 75. Run some numbers when you're in your early 40s, and then you can make some informed decisions on, "Hey, if I sacrifice a little bit now, here's the benefit that it's going to pay down the road, right?
Brian: Yeah. And as a financial advisor, I would say to Mike, "Yes, that's exactly correct. You got stuff screaming for money now." But I would say, "Mike, do you know your own worth? You've been at your job for a couple of decades now, and you're a loyal guy, and so forth. Are you sure you're being paid what your experience says you're worth? Have you looked at other opportunities out there? Have you talked to your bosses about, you know, where you are?" So sometimes you can simply increase what's coming in at the top, then you can find extra dollars. But again, that comes back to knowing what your value is and not wasting a bunch of time getting underpaid.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, introduce us to Lisa. Let's look at another test case here.
Brian: Okay. So a little bit of a different situation. So Lisa's got... She is a little bit nervous. And so she's got $0.5 million that she has put away, right, but we don't know where it came from. Of course, maybe she inherited it. She just let it build up over time. This is not retirement money, but it's just sitting in a money market fund, earning about 3%. So she's got about 13 years until retirement, which means at that 3% good safe rate, that's going to grow to about $725,000.
And she's also... In her retirement account, she's got an extra $250,000. So now she's got about $975,000 total, and that's not terrible, but she's drawing down that principal pretty quickly. And so mathematically, Lisa will be out of money by the time she's 80 or thereabouts.
So let's do this again. Let's say that she takes that $0.5 million and doesn't buy into the notion that the stock market could go poof tomorrow, right? I always love that argument, Bob, where people say, "The stock market, it goes down because so-and-so lost all his money." I'm looking at the S&P 500 right now. It still exists. Kroger is still open. P&G is still open. The stock market doesn't go away.
So if she puts it in a conservative balanced portfolio that would earn about 6.5%, by average, by about age 65, now her $0.5 million is $1.1 million. Add her existing $250,000 to that. Now she's retiring with a net worth of $1.5 million. That is a big difference between scraping by just paying the bills and having a nice, comfortable life.
Bob: Well, and it's a huge change. And the nice thing is it didn't require any sacrifice. She didn't have to earn more money. She didn't have to cut back on her current spending. All she had to do was change her investment strategy and be open to something that has worked for decades and decades and decades, and just take advantage of what the markets give you over a long period of time. And again, she didn't get an extra 20 years to save her money. She didn't win the lottery. She just made smarter, more intentional choices now in order to get those huge dividends down the road, making no other changes in her lifestyle.
Here's the Allworth advice. The future isn't a mystery. Oftentimes it's a math problem. And the earlier you solve it, the better your retirement story will probably end. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. And Brian, I'm going to give you my two cents here. Just another story on this whole, should I switch to a different house scenario? We talked about a couple of them during the prior segment. I'm going to share one that I've run across more often than not. And I want to spend a few minutes on and get your take on it, and it's this.
Brian: Story time with Bob Sponseller.
Bob: Story time. A lot of times, people say, "Hey, Bob, we want to downsize. We want to sell our big house, and we want to buy a ranch with everything on the first floor in a big, great room. And so we're going to sell our four or five-bedroom house. We're going to pocket all that money, and we're going to be able to go out and get this beautiful ranch that has everything on the first floor, and that'll solve all our problems going forward."
What I find oftentimes is they have not gone out and looked at the cost of this ranch home, factored in the part that everybody wants a ranch home with the main bedroom and bathroom on the first floor in the big, great room. And those houses cost a lot of money. And when people go out and start looking at it, they find that they're really not going to save any money. And oftentimes, by the time they fix up that ranch house, they're looking at spending more money than what their current house is worth. And they rationalized making a decision...
Brian: Lots of subdivisions, yeah.
Bob: ...in the spirit of "downsizing," and they didn't really downsize at all. Have you ever seen that one come down the pike?
Brian: Oh, absolutely. And I think this is a big supply and demand discussion because there's tons of... You can drive anywhere around Cincinnati and see new subdivisions going up. How many of them are full of ranch homes, right? And I'm not referring to the ones where they're all patio homes, retirement-type community. There's a lot of people who aren't quite ready to take that step yet. They want a ranch home in a more traditional neighborhood, but those don't exist anymore because the builders can't make as much to build them.
Bob: Yeah. And here's the point I'm trying to make here. Count the cost and take your time before you delve into this. Oftentimes, if you spend a little bit of money on an architect and take your existing four-bedroom home with the master bedroom and bath on the second floor and convert your first floor to accommodate all that, you can find that you could spend less money staying put, putting a little money into that existing home, staying in that neighborhood that you love and have been there forever, and really win as opposed to just making a rational short-term decision that you might be surprised at how much money and aggravation it costs you.
Brian: Yeah. I've had some clients go through this, and I joke with them, and there's more than one where they almost, financially speaking, built a house inside of a house. They spent a significant amount of money improving their place for this exact reason, but it prevented them from having to buy a whole new place and incurring those expenses. So even though it was significant to reconfigure their house to something that would make them happy, it wasn't near what a brand new house would cost.
Bob: Well, and a lot of people like all that first-floor stuff, the master bath, the master bedroom, the great room. And if you do take the time to reconfigure a current home, if you stay in it and your heirs do decide to sell it down the road, they're selling a lot quicker because it's been fixed up to meet that supply and demand that we talk about.
All right. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
Brian: Yeah, so things have changed. Financial freedom used to be, "Here's my retirement date, and I'm going to mark all these Xs on the calendar until it's time to no longer go into the office ever again, and I'm just going to spend the rest of my life on a beach." But now people are feeling a little bit differently, and we hear this every day here at Allworth as we're sitting down with clients and prospective clients talking about financial planning.
And it's people who come in and they say, "You know, I thought I wanted to just do a bunch of nothing, but now I know, so I got family members, I got friends who have retired and have gone ahead of me." And sometimes they're just not as happy because they don't have that sense of purpose anymore. So people are thinking a little bit differently about something called financial flexibility.
So, you know, let's pretend you're a family with maybe $1 million to $5 million, and it might be a more realistic, fulfilling target here. Flexibility means you don't really have to stop working, you just choose how you work, when, and with whom. And a lot of times, this conversation comes in the form of, "Let's talk about what you might do when this particular job, this particular career, is no longer necessary."
Maybe you're not ready to completely hang it up and let the dust collect on you, but maybe it's time to seek a new job in a spot where it's not the salary that matters, and maybe it's not the benefits because you've already kind of won that game. But it might be something where you're still bringing a little bit of income to help bridge the gap during retirement, but you're not quite ready to completely hang it up and have no reason to get out of bed anymore.
Bob: Yeah, I'm finding... I'm having this discussion more and more with folks that are retiring today than I did with folks that I started working with 20 to 30 years ago. I agree. It used to be, "Hey, I'm 58, 59. Show me how I can get out of there now. I can't wait to get out of there and never go to work anymore." And that's not the case anymore. A lot of folks, even in their late 60s and 70s, they want a way to do something. They want to stay involved. They got a lot of experience and acquired wisdom and value to add to whether it's the company they worked for for 30 or 40 years, or nonprofits, or serve on ministry boards, anything like that. They just don't want to be chained to a 60 to 70-hour work schedule.
And I'm finding that companies and institutions are way more flexible than maybe they ever have before in allowing these folks to be involved and do some things because it really is a win-win for both parties. Are you finding that with any of your clients, Brian?
Brian: Yeah, absolutely. And one of the big companies around here that does this is General Electric. So they seem to be the gold standard.
Bob: That's exactly the company I'm thinking of.
Brian: Exactly.
Bob: Go ahead. Yeah.
Brian: There's a conga line of people who have their retirement dinner and then the very next week are coming back as a consultant or doing whatever they do. And that's just a well-worn path. It's almost... I can't remember the last time I had somebody tell me that they were ready to retire from General Electric and they had zero intent on taking that step.
It seems like a good move, though. Those seem to be some pretty happy people because they get to slough off some of the duties that they had before. They do feel entitled and able to say no to things, whereas when you're working and you're in the grind, when you're 30s, 40s, 50s, you're just part of the machine, and so forth. But those folks do seem to have a little more flexibility, and they do seem to be a little more relaxed. And it's a great baby step into retirement.
And I think that can be a great thing for anybody. Just the idea of, "You know what? I'm going to start to back off a little bit, rather than that cold water shock of, today I get out of bed, and I go for my last day of work, and then I have my retirement dinner, say goodbye to everybody, and then tomorrow, what am I going to do?" That can be a really, really scary thing. So these sort of baby steps into retirement can be very powerful.
Bob: Well, let's talk about a different way of maybe creating those baby steps into something else. And here's what I mean by that, Brian. We've just kind of talked about maybe the GE executive that work 50, 60 hours a week. They want to stay involved, but they want to do it on a 10 to 15 to 20-hour-a-week basis. We've got some other folks that say, "I want to make a complete different career path decision." Maybe I worked in IT or in engineering or what have you for 30 to 35 years. I want to open up a wood shop, or I want to work with orphan children in Zimbabwe. I want to do something like that. I'm seeing more and more of those conversations come up.
Let's talk about what we need to be doing as we think about those dreams and goals, and actually make it come into fruition or reality. What do we need to do in terms of planning and getting your finances in order?
Brian: Right. So what you're looking at there is if you want to be able to figure out what you can get away with here, first of all, you got to make sure that you understand your current situation, right? So you have a current budget, right, whatever it is. You may not be paying attention to it. You may not be putting money in envelopes or making sure that we only spend X at the grocery store or whatever, but you do have some kind of a lifestyle out there.
Presumably, if you are unaware of your budget, then you are either a very, very, very financially stable person, where you just know that you're bringing in more than you're spending, or you're a complete train wreck. So we'll assume that we're talking to the people who kind of have things on autopilot, and they're okay.
But you need to look really in depth at that to see what that actually is, because you got to figure out what is my minimum, what's a bare minimum I need to get going here? And a good, easy way to do that is to simply take a look at your take-home pay. You don't need to fill out a spreadsheet full of here's my magazine subscriptions and here's what we spend at Applebee's on the weekends and whatever. You can simply look at your take-home pay and figure out what's going where.
Top line is here's what hits the bank from all of our resources, from all of our income sources at the beginning of the month, and then here's where it goes. This goes to the mortgage. That'll be gone in two, three, however many years. We always carve out a little bit into savings. Maybe that's a goal you don't have to have anymore. This is going to college tuition or college savings right now. That's a finite goal, and so forth.
Once you knock off all those finite things that have a limited lifespan, then you will be down to the money you just spent to be you on a monthly basis. That is your target. Start with that and then figure out, how can I replicate that income from my existing sources? And therefore, here is a gap I need to make. And I can promise you, if you're one of these stable people, it's probably a lot less than you think it is. Most of the time, we come up with happy surprises in those discussions.
Bob: Yep. You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. And Brian, this is where having a really sound tax strategy comes into play. And we talk about this often. This is where having different buckets or sources from which you can take income, diversified sources of income, IRAs, 401(k)s, after-tax accounts, Roth accounts, blending an income strategy from those different sources. That's where we can really create some nice tax efficiency of that gap income, as you call it, and then really make this thing home in the later years.
Brian: Yes. Now, this is where things get more complicated, right? So for people who have worked very hard and built their plans and created several different resources, right? You've got Social Security history. You've got pre-tax dollars in your 401(k), 403(b). You might have Roth in the mix. Maybe you've got some taxables, all this other stuff. Then everything gets harder when you hit a point where you've got a lot of resources. All those resources are labeled and painted differently with regard to taxes. They're all going to get taxed differently.
When we are working slaves, you're paying ordinary income taxes. That's it. You go to work. Somebody gives you a check. You're going to get taxed at the ordinary income rates. Period. End of story. When you've created all of these different resources, now you got a choice to make, and congratulations, things just got harder and Bob and Brian just got a little more job security because there are any number of ways you can combine these things into an income stream that will keep you stable, but each one of them is going to have its own pros and cons.
So let me throw out one thing, though, for somebody who is thinking about this. I want to make sure that everybody knows of something called the rule of 55. Remember the rule of 55, Bob?
Bob: Yes.
Brian: So what we do there...
Bob: I hate those rules because everybody is different. You can't apply this rule of whatever to everybody because everybody's situation is different. But I don't want to take you off-track.
Brian: That's okay. And I threw you a softball there, and I almost hit you in the helmet. Sorry about that. But no, the rule of 55, this one does apply to everybody, which is nothing more than when you are 55 years old, you get to pull money out of your 401(k) without paying penalties.
So if you are a person who is considering an earlier retirement and one of your resources is pre-tax dollars in your 401(k), then know that you can pull money from the 401(k) without only paying income taxes, no 10% penalty, no early withdrawal penalty.
That does not apply to IRA. You'll notice I said the word 401(k) six or seven times in that whole exchange there. The IRA age is 59.5. That's what most people think everything is. But if it's a 401(k), it's 55. You can draw on that without penalty.
Bob: Yeah. And let's not ignore the whole healthcare question, because what we're talking about here is these bridge years. If you want to retire early and transition into something else, and let's face it, if you go from a for-profit business into a nonprofit, a ministry, something like that, the benefits often are not as great and you got to sometimes self-insure yourself between when you retire from your company job and when you get to Medicare. We got to help people transition and get good, sound medical coverage, and sometimes people overlook that.
I heard of one lady yesterday who... I mean, she could work anywhere. She's brilliant, but she just decided to go work part-time at Costco, working in some department of Costco that sold widgets or garden equipment or something that she was really interested in, solely to get over there for about 10 hours a week, work part-time, but get healthcare coverage between her late 50s. And when she could go on Medicare, she's totally happy with her life. She goes in there, rolls in for her 10 hours a week. She does something completely different. She's out of there, but she's got that healthcare coverage and good healthcare coverage to bridge that gap to 65.
Brian: Yeah. And I think that's a great outcome. I want to throw out one caveat, something to keep in mind. And I'm going back to...this goes back 20, 30 years, when I first started in this industry, and Home Depot and Lowe's, the big box hardware stores, were kind of new. And there were a lot of...always tend to be older men who want to retire from my job. I love working with my hands, so I want to help people do that. That sounds like fun. So I'm going to go be an hourly guy at Home Depot and Lowe's. And you still see this every now and then.
But these are hardworking people who have their stuff together, and they will eventually recognize that, "Hey, this store isn't running as efficiently as it could. I'm going to fix it. I'm going to do things." And all of a sudden, management notices, and you get a promotion, and then that happens a couple of...three times. And all of a sudden, you have a new career that you didn't want. You only wanted to help people with their hardware projects a few hours a week. So just be careful of that trap.
Bob: That's good. Here's the Allworth advice. The question isn't when can I retire? It's when can I start living the life I want to live? Coming up next, why clinging to old investments might be the one thing holding your whole retirement plan back. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you can't listen to "Simply Money" every night, subscribe and get our daily podcast. You can listen the following morning, during your commute to work, or at the gym. Just search "Simply Money" on the iHeart app or wherever you find your podcasts.
Straight ahead at 6:43, the lessons you can learn from going into a retirement time machine. Brian, that's going to be kind of fun. All right. We see it all the time. Someone walks into our office with a portfolio they built over 20 or 30 years, and it's filled with all kinds of stuff, Brian. The stocks they love, mutual funds from their 401(k) days, maybe even some company shares from a past employer. And when we sit across the desk and ask them why they own these certain things, the answer is often, "Well, I've just always had it," or, "It's done well for me," or even, "It's part of my story." What do you say to those people, Brian?
Brian: You know, Bob, I'm going through this literally today and the other day and through this weekend, just in a slightly different area of life. And I'm referring to my garage. I have a lot of unfinished little projects out there that they're all sitting in the garage, about maybe 80%, 90% state of completion. And I'm sure whatever they are was important to me the day that I was working on it, but I've completely forgotten about it, and they're just kind of there.
And a lot of times, that's what happens to people, and frankly, that's what drives people in the door because eventually, they step way back and finally look at the forest instead of the individual trees, and they go, "What is all of this stuff? What does it mean to me?" And they realize, "I'm not even that interested really in maintaining this stuff anymore." And Bob, that defines me. I can't remember the last time I changed my oil in my lawnmower, but it still starts. The day that it doesn't start, I'll probably hire a professional. But anyway.
So yeah, people come in and they've got this grab bag of just stuff that they... Some of it they inherited, some of it they bought because they were interested in investing a while ago, or something like that, but they've never figured out exactly what role does all this money play when they're trying to knit it all together into something that can help them retire or accomplish their financial goal.
Bob: Yeah, the point we're trying to make here is your investment portfolio, it's not a scrapbook. It's not a half-rebuilt Harley-Davidson in your garage with a bunch of tools lying around, or a family photo album because dad, grandpa, mom used to work at this company and that's why we all own the stock, even though none of us pays attention to the company. And you do need to change the oil on your lawnmower, by the way, Brian.
Brian: Not yet. Not yet. I don't. It started this weekend, Bob.
Bob: Well, you'll be surprised when that day comes. All right. The point with this whole collection of investments is it is a tool, you know, it should be built to do a job. And if it's not doing that job anymore, meaning your consolidated, coordinated investment and tax strategy, it might be time to let some of those things go. And letting some of those components of your portfolio go, it doesn't mean you were wrong before. It just means you're evolving.
And we talk about, all the time, investments, this investment business. And particularly the tax benefits and tax opportunities around investing has changed and evolved dramatically over the last 10 to 15 years. And we find a lot of times, people aren't even aware that some of these strategies even exist.
Brian: Right. So let's take an example here. And I think having been in this industry, both of us here, Bob, for several decades now, one of the big stories in the stock market over the last several decades has been Apple. Throwing that as an example, because Apple's a great company, a strong company. They're not going away, but not quite the shining beacon that they once were. Steve Jobs is gone. Everybody has an iPhone. Things just don't seem to be innovating the way they used to.
But if you've owned Apple for a few decades, then you have a pretty good chunk of stock. And also, you probably have some notion that if you were to sell it, if it's in a taxable account, you were to sell it, you're going to pay taxes. Most people go, "Oh, I just can't sell because I'm going to have to pay taxes. I can't deal with that." Don't want to have to think about it.
Bob: Well, and then that whole portfolio attachment thing comes into play. And here's what I mean by that. I mean, we love staring at a statement or an online portfolio summary. And we love seeing that 400% gain every day. It proves to us emotionally that we were right. We bought a stock and it went up, and we made a bunch of money. And you sit there and stare at that big percentage gain and say, "This has done great for me. Why would I ever sell it?" I...you, but a lot of people don't look at what the performance of that nice stock position has done, maybe in the last three to five years, as opposed to a diversified portfolio. Do you ever find that?
Brian: I do. Absolutely. And I'll go back to my garage full of projects. Sometimes you have a statement full of projects that had a purpose at one point in your past. So really, I think the goal here is, okay, now you've got something. What are you going to do with it? So what could people do? Let's get into that, Bob.
So this is all money, right? These are all financial instruments, and they should somehow be supporting you. Otherwise, what was the point? So something you might think about if you've got these kind of assets out there, if you are charitably inclined and you've got appreciated stocks, then you should look into something called a donor-advised fund. You can donate those shares to a donor-advised fund. You will reap the benefits of a deduction, which you may not have anymore, right?
When the standard deduction became a lot larger, a lot of people lost the benefit of deducting charitable contributions. But this is a way a donor-advised fund would allow you to make a contribution now but not ultimately have the charity receive it until a time of your choosing. So you make an irrevocable deduction now, give it to the charity over the same two, three, four, or five years you would have intended anyway.
Bob: Especially if you're one of those folks that's still writing checks or putting currency into the offering plate at church, or writing a check to chosen charities, and you're not even able to take advantage of the much larger standard deduction for married couples. This is a miss that we find all the time. And it's great that people are giving money to charity, but there's just better ways to do it. And to your point, you can kind of scale out of that large, concentrated position and do it on a much more tax-efficient basis.
Another thing that we've talked about recently, and it's worth mentioning here again, is direct indexing. There are strategies where you can exchange that low-cost basis stock for a fully diversified portfolio of stocks and not have to take the tax hit. It's a wonderful strategy.
Brian: Yeah. And that's a way to... Again, you're putting diversification into your portfolio. So let's give a quick example. We're here in Cincinnati. So let's say one of us has a bunch of P&G stock. Another one of us has a bunch of GE. Another one has a bunch of Kroger, and keep adding to the list. Well, if we sell those because we want to diversify, then, yeah, we're going to incur capital gain because we sold the stock and took the gain.
However, if we all contribute in kind those shares to another fund and then we redistribute shares of that fund to ourselves, now we have a more diversified portfolio and no one has actually executed a sale resulting in a capital gain. So that's called an exchange fund, and it's another way to deal with the risk of a position that's got a little too big.
Bob: Yeah. So it comes down to when to reevaluate. And the way I look at this is we all have to ask ourselves, does this investment that I'm holding still align with my current needs? Is it helping me hit my long-term plan, or am I just holding it because I'm afraid to let it go, or I don't want to walk out into that garage and clean up all the stuff lying on the floor?
Brian: And you sound like my spouse, Bob.
Bob: I got one of those two. Hey, if you don't know the answer, that's the sign it's time for a review, whether it's an old mutual fund, a legacy annuity, or a chunk of employer stock. You owe it to yourself to reassess and reassess that with a good fiduciary advisor who can help you look at your various options.
Here's the Allworth advice. Your money isn't your identity. It's a tool to build the life you want today, tomorrow, and into retirement. Coming up next, it's the most emotional and most overlooked retirement decision. And we're going to get into it coming up next. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. We talk a lot about how to downsize your portfolio, but today, we want to talk about downsizing something far more emotional. And Brian, we run into this often with clients, the whole topic of downsizing your home.
Brian: Yeah. So this comes up in a lot of ways during financial planning. It comes up in a form of, you know, people will realize that, "You know what, do we want to be in this house anymore? The kids are up and out, and now it's just a bunch of bedrooms I got to clean," and that kind of thing.
But what I find, Bob, is frequently, people who have come to that conclusion will decide to move, and then they move into a house that is the same size. I think we get into our heads that, "Well, I've always lived in a five-bedroom house. That's just kind of what I need, which is, you know, I don't want to... It's too scary to go smaller." But then inevitably, we'll find people, you know, talking about how they bought too much house.
And heaven forbid, you know, a lot of times there winds up being a mortgage against it. Don't be one of those people who retires and then puts a 30-year mortgage in place for a bigger home that you're just going to fill with stuff that someday you're going to have to drag to goodwill.
Bob: Well, we also talk with families that are struggling with, hey, they deep down know that this big house that they raised their kids in and where they've got a ton of memories and it's been paid off for years and they kind of swore to each other they'd never leave the house, you know, they just feel like they can't leave because of all these memories. They want to have a place for their kids to come back, all good stuff. But sometimes those maintenance costs, taxes, upkeep, it just becomes a huge burden to them that prevents them from traveling and doing some other things that they might otherwise like to do if they didn't have this huge house to take care of.
Brian: And Bob, I think this is where some war stories from our financial planning tables here at Allworth can come in. And what I'm speaking about is when we've got, you know, the heirs of their parents, my mom and dad have passed away. It's time to settle the estate, and it's time for... Everybody has received their distributions. And the very first thing that they wind up talking about is, "We're going to get rid of this house. Mom and Dad were convinced that we wanted it. We just didn't. None of us, the siblings, nobody wanted this house because we've all got our own houses and we're happy where we are."
I think people tend to convince themselves that, "I have these warm, wonderful memories." And this isn't to take any of that away. That is important stuff. "But I have these warm, wonderful memories in this structure. Therefore, it must be maintained and passed down."
And your kids have those warm, wonderful memories, too, and they know it's important to you. They may not be being upfront with you as to whether they really want this house. Most of the time, one of the very first calls that happens during the settlement of an estate is a real estate agent, because we can't let that house sit empty. We got to deal with it. Something is going to go wrong with it if nobody is paying attention to it. And we're going to eat property taxes and expenses as long as we have it. So they're going to sell it relatively quickly. So make decisions based on that knowledge as you move forward on your own plan.
Bob: Well, the other thing to keep in mind, Brian, is the larger the house and the longer you've lived there. And my wife and I went through this personally about four years ago. The more accumulated crap you've got in that house, to use your garage and tool example, I mean, you stay in a house for 17, 18, 20 years. You raise a few kids there, and you got a whole bunch of stuff lying around in there that you don't need and nobody wants. And if you end up dying with that big house and all the crud that's in it, that can create a whole other set of burdens for your kids. How are we going to get rid of all this stuff?
Brian: Yeah. I always think back to seventh-grade chemistry over at St. Ignatius on there on the west side when I think about this, a gaseous element. One of the characteristics of a gaseous element is that it expands to fill the container it's in. And I got news for you, Bob. So do we. If I have a big house, I'm going to fill it with stuff I probably don't need, but I got the room for it, so why not?
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Let's get into taxes and numbers a little bit. Brian, what are some of the benefits, in addition to unburdening yourself with the huge house and all the stuff that's in it? Let's talk about tax planning opportunities if you decide to make a change.
Brian: Yeah. So one of the things that most people are comfortable with is the concept of, well, if I own something, anything, a stock, a mutual fund, collectibles, crypto, whatever, if I'm going to sell it at a gain, then the IRS is going to come sniffing around for some taxes. And that is true most of the time, but not in this case.
So if you're sitting on a house that has a good chunk of equity built into it, there are some rules you got to follow. But basically, the moment you downsize that home to a smaller house, you will have incurred a gain. You can always roll the gain forward when you're buying a bigger house. That's never a thing.
But when you are buying a smaller house, you get a one-time lifetime exemption where you can take up to a $250,000 gain if you're an individual, $0.5 million gain per couple, and you can avoid paying any capital gain taxes on that at all. And again, this is specific to a house. You have to have lived in it for two of the previous five years, right? There's no flipping a property here in the short term. Has to really be your house. And so there are some hoops you got to jump through there. But the point is, you can get out from under that home and avoid capital gain taxes.
Bob: Yeah. One more thing to throw out there if you're thinking... And we're not trying to sell people on liquidating their home. But a lot of times, people, I think they want to make a change. They just don't know how to go about it. You talked about the tax implications.
One other thing, just from an emotional and lifestyle standpoint, is test it out. Go rent something for 3 to 6 months or a year that might be in your wheelhouse or where you think you might want to live from a lifestyle standpoint and home standpoint and see how it works before you pull the trigger and buy something else or sell that home that you've been in for 20 years. Test it out. Make sure it's the right move, and then you're not going to regret your decision down the road.
Here's the Allworth advice. Your home has served your family, perhaps for decades. Now it's time to ask, is it still serving you? Coming up next, how a retirement time machine can keep you from making bad financial decisions. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. If you have a financial question you'd like for us to answer, well, there's a red button you can click while you're listening to the show right there on the iHeart app. Simply record your question, and it will come straight to us.
We all want to know what retirement will look like, but most of us are making choices today without fully understanding the future impact at all. What if you could climb into a time machine, Brian, and see the results of your decisions 15 to 20 years down the road? Wouldn't that be fun?
Brian: Yeah, this is really an important part of financial planning. So I think a lot of people get hung up on the idea that, "I can't predict the future. I don't know what's going to happen. Therefore, I shouldn't bother making any decisions right now." And that impacts things from, how much should I be saving in my 401(k)? When do I turn on my Social Security? Can we afford to take this big vacation or, you know, retire at a certain time or whatever? It's never about right now. Most people are able to make the decision that they want and do what their gut tells them they want to do right now. But we can't pull the trigger because we cannot see 15, 20 years into the future.
So let's go through some mathematical examples here to kind of help people understand what this is about. First, we'll take Mike. Mike is a young guy. He's established in his career, married, he's got a couple of kids, brings in $150,000 a year. Mike's big question. We get this all the time. Am I putting enough away in my 401(k)? And the answer to that is, well, what are you trying to accomplish with it? Are you one of these FIRE people, you know, Financial Independence, Retire Early? Well, then the answer is put as much as you can possibly afford and not mess up your current bills. Or are you somebody who wants to live a certain lifestyle? You're just trying to make sure you're putting away a minimum of enough.
So Mike right now is putting 10% into his 401(k). That's pretty average. That's pretty standard. We try to get everybody to double digits, and then you'll be in the ballpark of okay. But he's wondering, "Well, what if we sacrifice some things now, and instead of 10%, I put 20% in, and my pay drops, my take-home pay drops now, but at the same time, I'm putting away more money? So his original plan, Bob, if he's putting away 10% and we get a 7% annual return, right, that's kind of the Goldilocks zone. That's not too high, not too low. It's not unreasonable.
Bob: Good, balanced portfolio over a long term.
Brian: Exactly, yeah. It's not super risky.
Bob: Responsible return assumption.
Brian: Yeah. No, a 40-year-old guy could be more aggressive. That's a little bit of a different story. So we're just trying to keep the numbers simple. So if Mike does that, he works for 25 years, and now he's got roughly $900,000 in today's dollars, that's a nice pile. He's doing okay.
Bob: At age 65.
Brian: At age 65. So he's 40 now. We did this for 20 years. What's the difference? So he right now could generate about maybe a reliable $50,000 a year worth of income off of that on top of his... He'll have Social Security and some other things as well. And that's pretty good, but it might limit them. They maybe back off on the travel, or maybe there's not as much going to the grandkids, to the rest of the family.
So let's look at it again. Mike, who is, again, now 40, decides, you know what, let's forego some of the take-home pay. I'm going to bump to 20%. What does that result in? Now, putting 20% of his salary away for 25 years, now he's got $1.8 million. And this is just math. This is the snowball effect. The bigger the numbers, the larger the snowball gets. And this really starts to change the game because now we're talking $90,000 in sustainable retirement income. Again, that's in addition to Social Security. All that stuff, Bob, is back on the table. Retiring earlier, taking the bigger trips, helping the grandkids, all of it's back.
Bob: Well, and we need to talk about one thing, and I'm going back in time, you know, reverse time machine. Remember, Mike's 40, and he has 2 kids. Those two kids cost money. So Mike's probably right in the middle of travel, sports, music lessons, you know, ballet lessons, all that stuff. He's probably saying, "Yeah, Bob and Brian, it'd be great to put 20% of my income away, but I got bills, you know, to cover today." So it is a balancing act. It's easy for us to pull out a calculator and say, "Yep, you could have $1.8 billion if you save all this money."
I think the point we're trying to make is at least run some numbers and just don't hope all this works out at age 65, 70, 75. Run some numbers when you're in your early 40s, and then you can make some informed decisions on, "Hey, if I sacrifice a little bit now, here's the benefit that it's going to pay down the road, right?
Brian: Yeah. And as a financial advisor, I would say to Mike, "Yes, that's exactly correct. You got stuff screaming for money now." But I would say, "Mike, do you know your own worth? You've been at your job for a couple of decades now, and you're a loyal guy, and so forth. Are you sure you're being paid what your experience says you're worth? Have you looked at other opportunities out there? Have you talked to your bosses about, you know, where you are?" So sometimes you can simply increase what's coming in at the top, then you can find extra dollars. But again, that comes back to knowing what your value is and not wasting a bunch of time getting underpaid.
Bob: You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. Brian, introduce us to Lisa. Let's look at another test case here.
Brian: Okay. So a little bit of a different situation. So Lisa's got... She is a little bit nervous. And so she's got $0.5 million that she has put away, right, but we don't know where it came from. Of course, maybe she inherited it. She just let it build up over time. This is not retirement money, but it's just sitting in a money market fund, earning about 3%. So she's got about 13 years until retirement, which means at that 3% good safe rate, that's going to grow to about $725,000.
And she's also... In her retirement account, she's got an extra $250,000. So now she's got about $975,000 total, and that's not terrible, but she's drawing down that principal pretty quickly. And so mathematically, Lisa will be out of money by the time she's 80 or thereabouts.
So let's do this again. Let's say that she takes that $0.5 million and doesn't buy into the notion that the stock market could go poof tomorrow, right? I always love that argument, Bob, where people say, "The stock market, it goes down because so-and-so lost all his money." I'm looking at the S&P 500 right now. It still exists. Kroger is still open. P&G is still open. The stock market doesn't go away.
So if she puts it in a conservative balanced portfolio that would earn about 6.5%, by average, by about age 65, now her $0.5 million is $1.1 million. Add her existing $250,000 to that. Now she's retiring with a net worth of $1.5 million. That is a big difference between scraping by just paying the bills and having a nice, comfortable life.
Bob: Well, and it's a huge change. And the nice thing is it didn't require any sacrifice. She didn't have to earn more money. She didn't have to cut back on her current spending. All she had to do was change her investment strategy and be open to something that has worked for decades and decades and decades, and just take advantage of what the markets give you over a long period of time. And again, she didn't get an extra 20 years to save her money. She didn't win the lottery. She just made smarter, more intentional choices now in order to get those huge dividends down the road, making no other changes in her lifestyle.
Here's the Allworth advice. The future isn't a mystery. Oftentimes it's a math problem. And the earlier you solve it, the better your retirement story will probably end. You're listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money," presented by Allworth Financial. I'm Bob Sponseller, along with Brian James. And Brian, I'm going to give you my two cents here. Just another story on this whole, should I switch to a different house scenario? We talked about a couple of them during the prior segment. I'm going to share one that I've run across more often than not. And I want to spend a few minutes on and get your take on it, and it's this.
Brian: Story time with Bob Sponseller.
Bob: Story time. A lot of times, people say, "Hey, Bob, we want to downsize. We want to sell our big house, and we want to buy a ranch with everything on the first floor in a big, great room. And so we're going to sell our four or five-bedroom house. We're going to pocket all that money, and we're going to be able to go out and get this beautiful ranch that has everything on the first floor, and that'll solve all our problems going forward."
What I find oftentimes is they have not gone out and looked at the cost of this ranch home, factored in the part that everybody wants a ranch home with the main bedroom and bathroom on the first floor in the big, great room. And those houses cost a lot of money. And when people go out and start looking at it, they find that they're really not going to save any money. And oftentimes, by the time they fix up that ranch house, they're looking at spending more money than what their current house is worth. And they rationalized making a decision...
Brian: Lots of subdivisions, yeah.
Bob: ...in the spirit of "downsizing," and they didn't really downsize at all. Have you ever seen that one come down the pike?
Brian: Oh, absolutely. And I think this is a big supply and demand discussion because there's tons of... You can drive anywhere around Cincinnati and see new subdivisions going up. How many of them are full of ranch homes, right? And I'm not referring to the ones where they're all patio homes, retirement-type community. There's a lot of people who aren't quite ready to take that step yet. They want a ranch home in a more traditional neighborhood, but those don't exist anymore because the builders can't make as much to build them.
Bob: Yeah. And here's the point I'm trying to make here. Count the cost and take your time before you delve into this. Oftentimes, if you spend a little bit of money on an architect and take your existing four-bedroom home with the master bedroom and bath on the second floor and convert your first floor to accommodate all that, you can find that you could spend less money staying put, putting a little money into that existing home, staying in that neighborhood that you love and have been there forever, and really win as opposed to just making a rational short-term decision that you might be surprised at how much money and aggravation it costs you.
Brian: Yeah. I've had some clients go through this, and I joke with them, and there's more than one where they almost, financially speaking, built a house inside of a house. They spent a significant amount of money improving their place for this exact reason, but it prevented them from having to buy a whole new place and incurring those expenses. So even though it was significant to reconfigure their house to something that would make them happy, it wasn't near what a brand new house would cost.
Bob: Well, and a lot of people like all that first-floor stuff, the master bath, the master bedroom, the great room. And if you do take the time to reconfigure a current home, if you stay in it and your heirs do decide to sell it down the road, they're selling a lot quicker because it's been fixed up to meet that supply and demand that we talk about.
All right. Thanks for listening. You've been listening to "Simply Money," presented by Allworth Financial on 55KRC, THE Talk Station.