When we open up the mailbag at Keen on Retirement we usually try to answer as many of the thoughtful questions our listeners send us as time allows.
But this week is different.
On today’s show, we tackle one big retirement question from a listener with a lot on his mind. Retirement is nearing for both him and his wife. Decisions have to be made about portfolio rebalancing, withdrawal rates, and legacy planning. The breadth of issues and wealth of options are intimidating, and worse, this listener isn’t sure who to trust with these important questions.
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This episode covers a lot of ground, but here are four key excerpts that I think lead this discussion towards the big answer our listener is really looking for.
1. “I am embarrassed to say that I haven’t had much of a retirement strategy other than spend less than I make and put 12% in my retirement savings account.”
Embarrassed? Are you kidding me?
I don’t know how many universal rules there are for financial planning but “spend less than you make” is definitely one of them!
A big mantra for us at Keen Wealth is “control the controllable.” You can’t control what happens to the market after a hurricane. But you can control your spending and the amount you save and invest every month. What this listener sees as a negligent or simplistic approach is actually the cornerstone of successful wealth-building over a lifetime, and a habit we try to encourage in all of our clients.
2. “My wife and I aren’t sure if our money will last after inflation and health care expenses. We need about $8,000 per month after taxes to live on comfortably, and that includes fun things.”
Another big positive: a projected budget!
That’s so important once you switch from living off a paycheck to living off your retirement assets and investments. You need to have a plan in place – one that, yes, accounts for inflation as well as the changes to your health care expenses triggered by moving to Medicare.
But I’m glad that the listener’s budget also includes “fun things!” Many new retirees are so worried about running out of money that they live too conservatively and don’t enjoy themselves. A fulfilling retirement is supposed to be your reward for all your hard work and prudent planning. Fun SHOULD be part of the budget.
How big a part, and how big a budget, well, that depends. The old 4% withdrawal rate per annum is a good place to start, but that figure is a bit outdated considering that today’s retirees are living longer and more active lives. Also, remember that your retirement spending probably won’t be a straight line. Many retirees spend more money early in retirement while they’re taking vacations and playing golf and then slow down their spending as they slow down. Your retirement budget will depend on your particular set of assets and your unique vision for what you want your life in retirement to be like.
3. “We have about $500,000 in mutual funds in our after-tax account, and it seems we have to pay a lot of taxes from time to time on capital gains distributions even when we didn’t sell anything or make money on certain funds. Also, our insurance broker says that our kids will pay taxes on our IRAs when we pass, and that we need life insurance to cover that.”
A mutual fund can have hundreds or even thousands of securities bundled inside of it. Hypothetically speaking, let’s say that you’re invested in a fund that bought Apple stock at a very low price 20 years ago. When the fund decides to sell Apple, it passes that gain on to everyone who owns the fund in the year of the sale. You may have just bought into that particular fund and may be up or down so far in your investment, but you still have to pay taxes on the gain that the fund made on the Apple stock over the last 20 years.
These inherited tax liabilities are why we generally avoid mutual funds at Keen Wealth, especially once our clients have grown large assets. We prefer holding individual securities and indexes because of cost basis identification and tax efficiencies.
As for the IRAs, your beneficiaries will have to pay taxes when they take distributions from the IRAs, although they could elect to take distributions from the IRA over the course of their lifetimes and avoid one large taxable event. They don’t necessarily need funds from a life insurance plan to cover those taxes. But if this listener has the means to purchase a policy, then it’s just a matter of preference – and a heck of a gift!
4. “How do we go about getting help with all our questions? Who can we trust, and how do we go about laying out all this very personal information for someone to help us? It seems scary.”
Of course it’s scary. Your entire working life has been building towards this transition. Your retirement isn’t just numbers on a page, it’s a personal vision of happiness. You want to be sure that you’re sharing this part of your life with someone who appreciates that vision and all the planning that went into it.
If you’re seeking financial advice from a broker who follows only suitability rules, you could find yourself at the mercy of whatever products maximize that broker’s commission. But advisors like my team at Keen Wealth, who adhere to the fiduciary standard, are bound by law to put your best interests first. Not only can we give you expert advice on the kinds of planning questions mentioned in this episode, but we can also help to “quarterback” the whole of your retirement plan. We can help our clients find reliable estate attorneys. We can help our clients find CPAs they can count on at tax time. And we make sure that this team of professionals works together to do the most good for our clients’ finances and their lives.
Ultimately, my answer to this listener’s questions is this: Work with a fiduciary advisor.
If that answer sounds too simple, too good to be true, make an appointment to talk to us at Keen Wealth. This is one instance where the simplest answer really is the best – for you, and for your money.
Bill Keen on Retirement Questions …
“You can trust your fiduciary advisor to give you expert advice on retirement planning questions and also to help “quarterback” the whole of your retirement plan.”
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Got a question or comment? Email it to me and we’ll get back to you or call our office at (913) 624-1841.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 24 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.