In today’s episode, you’ll learn more about:
- Why your investment strategy needs to change as you shift from saving to spending
- How tax planning becomes more important once you’re no longer relying on a W-2
- The impact of Social Security timing decisions, especially for married couples
- The risks of taking on more investment risk to “catch up”
- And how healthcare costs — both before and after Medicare — can affect your plan
Listen Now:
The Smart Take:
As you get closer to retirement, it’s usually not one big mistake that throws things off — it’s a handful of smaller decisions that can quietly add up over time.
In this episode, Tyler Emrick, CFA, CFP®, walks through five of the most common money moves near retirees make and what to be thinking about instead as you transition into retirement.
If you’re within a few years of retirement, this episode will help you avoid some of the most common pitfalls and make more intentional decisions with your money.
Go Inside the Episode:
0:00 – Intro
2:35 – Mistake #1: Investing the same way
8:20 – Mistake #2: Ignoring tax planning
9:48 – Mistake #3: No Social Security strategy
12:24 – Mistake #4: Taking on too much risk
16:06 – Mistake #5: Underestimating healthcare costs
19:45 – Final thoughts and planning takeaways
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
Most people don’t make one big mistake as they approach retirement. It’s usually a handful of smaller ones. Those small decisions can start to have a pretty big impact. So what I want to cover today is to walk you through the most common money mistakes I see retirees make as they get closer to retirement. And more importantly, what you should be doing instead if you want to get the transition right.
Walter Storholt:
Hey, we’re back on Retire Smarter. I’m Walter Storholt as always joined by Tyler Emrick of True Wealth Design, where he is a wealth advisor, also a certified financial planner and chartered financial analyst, and all around great guy to talk to each and every show. Always look forward to these sessions with you, Tyler, because I do retire smarter. At least I’m heading that direction.
Tyler Emrick:
We all try to.
Walter Storholt:
I feel like I learn a nugget every episode.
Tyler Emrick:
You got it.
Walter Storholt:
This one’s a good one. So we’ve got five money mistakes essentially that folks make as they get close to retirement. And people like lists, so it’s good to do these every once in a while, right?
Tyler Emrick:
Oh, absolutely. We try to. I’m on the same sites everybody else’s, right?
Walter Storholt:
Yeah.
Tyler Emrick:
I’m checking out the ARPs. We’re on the mailing list and get those through the emails and all that. And I’ll stash away some of these lists over the year, kind of put them together and then just pick out what I think is kind of the most impactful, or maybe we can approach it from a different angle or whatnot because all these lists are out there. I mean, boy, if you’re heading into retirement or starting to think about it, there’s plenty of challenges potentially ahead of you as you think about that transition. Certainly a lot are financial, some emotional. I mean, it’s just a big change altogether.
So when you get these lists from time to time, you get some that are a little more punchy, some are a little more, “Oh, I didn’t even think about it that way,” even from my standpoint. So, always good to kind of revisit. We’ll see what we got. But yeah, I picked out my five favorite ones from the last year and we’ll just kind of dive in and give you a few thoughts on the way we think about each of them.
Walter Storholt:
Knowing you and Kevin, you’re not picking out the click-bait top five lists that are out there. You’re picking the ones that actually have some meat on the bones and breaking those down a little bit. So this will definitely have some meat to it, which I look forward to. Also, I think lists are great because you know what? You could just kind of wrap your mind around five things pretty easily. And then it’s easy to do your assessment, right? Like, “Oh, okay, I’m committing three of these five mistakes right now, or I’m in danger of doing that.” Or, “Hey, I’m five for five, good to go. That makes me feel better.” So it just helps put things in context I think a little bit easier for us too.
Tyler Emrick:
Oh, absolutely, and some of them can just be a good timing thing to think about. I mean, the first key point I had on here was investing the same old way as you transition to retirement. That’s the first one to kind of dive into. And if anybody’s watching the news lately, hey, there’s plenty of headlines to go around. Certainly the market here at the beginning of the year has been pretty volatile, especially depending on how you are allocated and what your investments are in. So when we start thinking about movements and accounts and you actually start to see account values change, it certainly drives you to start thinking about that stuff a little bit differently. And we just obviously want to be mindful of it. And this investing the same old way I think is very important.
So the first way to approach it, and when I go back to my list that I was looking through, the writer was actually kind of looking at it from the standpoint of this whole traditional sense of, “Hey, when you head into retirement, generally speaking, you need to make sure that you have a pot of money that where your distributions are going to come from, what are you going to live off of that is a little less volatile than maybe what you would think of a traditional stock being.” So most of those premises start with, “Well, hey, should you be taking less risk?” Okay.
And I would argue that, hey, that’s one way to look at it and certainly important, but I would also look at in the frame of your entire financial plan and what you’re trying to accomplish because not every family needs to decrease risk or be extremely conservative as they start to approach or thinking about retirement, right?
Hey, if you’re one of those individuals that has… I just sat with one a couple weeks ago, right? She had a pension, she had her Social Security, and I was like, “Hey, what do you”… We’re going down through spending and she’s like, “Well, yeah, pension Social Security is going to pretty much cover everything that we need.” This was a teacher, sizable pension, wonderful benefit. And she was like, “Well, I’m not really needing to have to live off of my assets until I get later on down the road, a little bit later on down in the plan and maybe need something outside of my normal living expenses.”
So for an individual like that, if you look at your picture like that and you’re like, “Hey, I got a great pension. Hey, I got Social Security, I don’t have any debt, I don’t need a whole lot to sustain my lifestyle.” Well, then the question becomes is, do you really need to pare back that risk? It’s very situational and very much based on the client and the family that we’re working with. And that’s what I would really urge individuals to be thinking about to say, “Hey, how does my investments need to work with my particular situation and what we’re trying to accomplish?”
We always go back to the financial plan and the always two numbers I bring up all the time are, one is like, what is the required rate of return you need to get on your money? You start projecting out the next 30 some years of retirement, what rate of return do you need to get on that money to make all those dreams and goals kind of come to fruition and come to life?
That’s a very important number to know because then we can match your portfolio with historical performance and we can set that portfolio up to kind of achieve that required rate of return over a long horizon. Just like with anything, Walt, I can’t tell you what’s going to happen in the stock market next week, but certainly over a long, happy, healthy retirement, we can kind of lean on our data and things kind of smooth out and we can make better decisions as we think about that overall mix in your investments and so on and so forth. But that required return’s big.
Walter Storholt:
What I’m hearing you say too is that this isn’t some switch that gets flipped where you’re like, “Oh, today I can no longer invest the same way I used to,”-
Tyler Emrick:
Yes, correct.
Walter Storholt:
… but it’s a process. It’s over a period of time this should be taking place, unless you’ve waited so long that this switch needs to be flipped. I guess there is a scenario where the, “Okay, we got to change the game here.” So it maybe depends on a little bit how you’ve gotten to this point.
Tyler Emrick:
How you’ve gotten to it and what you’re planning to do in retirement and how you plan on using those assets that you’ve accumulated over the years, right? But alongside required rate of return, we need to make sure that we’re emotionally comfortable with the expectations of those ups and downs of our assets as well. I always have a little bit of issues with some advisors where they’ll just come in, have you fill out a questionnaire and then, “Hey, this is how your investments should be done.”
Those questionnaires certainly can have a time and place, but it’s much more real when you start to see dollars coming out of your account and you really start to think about the true volatility, not only in stocks, but in bonds. I mean, shoot, a couple years ago in 2022, we had the worst bond market we’ve ever had. Well, so our even more conservative families were experiencing a little bit more volatility than they were used to. When you start talking about worst year of performance in bonds we’ve ever experienced, that’s a big outlier, right?
Walter Storholt:
Yeah.
Tyler Emrick:
The question becomes is, are you prepared for that type of volatility? So that way you don’t start making emotional decisions around buying and selling and changing up the portfolio after the fact, because inevitably that’s going to lead to bad outcomes. So we just want to kind of do that work upfront to make sure we’re being as clear as possible on expectations on kind of how those dollars and cents can move inside of accounts. And I stress dollars and cents because when we start talking about percentages, well, hey, 20% of a big number can be quite a bit, right? So you just want to be mindful what that dollar looks like and what to expect it.
So we do bear market tests is what we call it, that’s the fancy term. That’s how we kind of test it in portfolios, but whatever it is, that’s how you want to be looking at it. So don’t think that, “Hey, I’m going to invest the same exact way as I’ve been in retirement.” The question becomes is do that plan up front so that way you can decide and say, “Hey, what portfolios are going to accomplish my goals of retirement while I’m in retirement?” Much more applicable, I think, to most of the families listening.
Walter Storholt:
Yeah, absolutely. All right. So investing the same old way, easy to identify that mistake. You broke that one down great, Tyler. What’s the second item?
Tyler Emrick:
Taxes, taxes, taxes, right?
Walter Storholt:
You know we couldn’t get through the show without bringing taxes up. All right.
Tyler Emrick:
Have to at least talk about taxes, right? But not doing the proper tax planning. I think this is, very much we see it with families that maybe have different professionals that are all kind of siloed that they’re working with. They might have an accountant, they have their investment professional, they have their healthcare professional, they have their life insurance agent. They have all these professionals, but none of them are coordinating or talking together. I think that’s when you can really get into an issue of like, well, hey, are we looking at everything through appropriate lens and that lens being a tax lens? Extremely important.
You got fancy terms like IRMAA that we talk about all the time, healthcare subsidies and ACA subsidies that pop up that we might need to manage around. So there’s a whole host of things that consider when you consider your taxes and retirement, we need to make sure that’s pretty high up on the priority list.
And a lot of families that maybe didn’t have flexibility in taxes where, hey, they took the standard deduction, they had W2s and it kind of is what it is. When you turn that corner into retirement and you kind of have this whole, just a whole lot more options on where your money comes from, that tax planning becomes much, much more important as opposed to, “Hey, I got my W2, this is what it is, and we’re going to kind of rinse and repeat from there.” So I got to sneak in taxes that’s very high up on our priority list. But point number three or a third most common mistake I think is probably the one that I talk about the most with families, and that’s good old Social Security, Walt, and having a plan.
Walter Storholt:
Got to be a big one on the list, right? Because if you get Social Security wrong, it may not make your plan, but it could break your plan if you mess it up, right?
Tyler Emrick:
It could. And I think the hardest part, and from my perspective, analyzing when to take Social Security, is trying to wrap my arms around, what does this benefit look like 20 years down the road, 30 years down the road, right? Those numbers can get big, they can be hard to quantify and start to think through, right? Like what is the true impact, because that’s what you’re doing, right?
When you start saying, “Hey, do I want to take my Social Security now or do I want to delay?” To benefit from that delay, well, one, what you’re doing is you’re saying, “Hey, I want to kind of build in some protection, a higher floor of income later on in life.” And when you start adding in a spouse, those numbers can start looking a little different. There’s widow’s benefits, there’s spousal benefits. So having some type of plan around Social Security as opposed to just, “I’m going to take it now and, hey, I’m retired, that’s what I want to do.”
I think it definitely deserves time to step back, run some of those numbers and just frame it appropriately and make sure you fully understand some of your options with all the benefits that are afforded to you there, for sure. Now, I get it, Walt. Hey, Social Security, there’s a lot of headlines out there. “Hey, it’s going to run out of money, trust fund’s going to run out here in 2036.”
Walter Storholt:
“Might as well get it while I can.”
Tyler Emrick:
“Get it while can.”
Walter Storholt:
“I don’t know how long I’m going to live.”
Tyler Emrick:
“Hey, I’m not going to live.” You’ve heard them all, right? And that might be the case, right? But I still think it deserves a good conversation with you and your financial professional, or at least you doing the backend research to understand how are some of these things truly going to impact me and my situation, and what are some of the levers that you can pull, right?
Even if you get to the same spot and you end up kicking in early, at least you’re going to be better suited to understand how that impacts a long, happy, healthy retirement. So Social Security is a big one, and probably one that comes up on just about every list that I see.
Speaker 3:
What would your life look like if you designed it around your true wealth? It’s a powerful question, and one that True Wealth Design helps individuals, families, and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments, and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.
Walter Storholt:
All right. So we’ve hit taxes, we’ve hit Social Security, we’ve hit the, don’t invest like you used to, or at least change the way that you’ve been doing things. What else you got? Number four.
Tyler Emrick:
Number four, we’re staying with investments, right? Staying in that lane, right? And this one is taking on too much risk.
Walter Storholt:
Very common problem.
Tyler Emrick:
It can be, absolutely. Especially for individuals that, we see it a lot recently with some individuals that maybe have done very well with a particular stock or, hey, they’ve worked with at a company. I mean, we’re right in the backyard of companies like Sherwin Williams and Progressive where those stocks have done very, very well. You think about these individuals that have maybe worked for a company for a number of years, that company provided them wonderful income while they were working, and not only that, but their investment in that company stock has turned out tremendously over the years, right?
You go out on the West Coast, you can see all the big tech names, right? Your Nvidias of the world, your Apples of the world, and we start running into there. But I see it a lot with individuals that kind of have a lot of success in very concentrated stock positions and then trying to say, “Well, hey,” not really understanding or wanting to come to grips with the fact of like, “Hey, what does that risk really mean?” I was at a very large company early on in my career and they actually worked with General Motors and went through the whole 2008 General Motors, Ford, some of the car industry and what happened with those stocks.
And some of those individuals that I talked to Walt, I mean, hey, not only was there 401k all in that company stock and that stock dropped substantially, but then their pensions were at jeopardy too that were coming from those companies, and they had to take an early buyout and maybe were retiring a little bit earlier, right? So when I think about-
Walter Storholt:
So sometimes this risk compounds, that’s when it gets really dangerous.
Tyler Emrick:
It can. Well, and it can be the greatest source of your wealth creation over your working years, right? And that emotional tie to it, I think can be very challenging and something to look at. So the first key mistake we talked about just, hey, having the right portfolio and investing the same way. Here, taking on too much risk, I wanted to think about it more so from the framework of like stock concentration or investment concentration and making sure that your retirement is a little bit protected and you’re doing the things that you need to make sure that not all of your performance and return is tied to one particular type of company or even one particular type of sector, right? I mean, well, I mean, since the tech sector in general here in US at home has done tremendously well up until about 12, 18 months ago, right?
And that part of the market has seen a pretty substantial pullback in stocks like Microsoft and some of the other ones there having substantial pullbacks this year. So you’re starting to see some of that concentration risk. It can not only be in individual stocks, but you could do it in saying, “Hey, I’ve only invested in US large tech companies. It’s done very well for me over the last decade.”
But when you kind of look at a portfolio construction, part of our job as an advisor is to kind of help quantify, well, what does that risk really mean? Hey, it’s been great. It’s been rosy. Well, what if it all of a sudden isn’t, right? You can go back and talk about the lost decade from early 2000 to 2008 in US stocks where they returned practically nothing, right? There you would have one have been investing in international, you would have wanted to invest in emerging market investments. So losing sight of that diversification and being too concentrated in any individual stock or part of the market, I think is a big risk and one of the ones that I wanted to kind of zero in. A little more granular, right?
Walter Storholt:
Yeah. But it kind of points back to point number one about not investing the same way you used to, right?
Tyler Emrick:
Correct. Absolutely. Absolutely. So final point here, underestimating healthcare costs, right?
Walter Storholt:
Yeah, I can see that.
Tyler Emrick:
And I think it’s probably one of the biggest planning opportunities as we think about individuals looking to go into retirement and that big gap of like, well, what does healthcare look like? I was just sitting with a family about a month ago, a new family, just started working with them. We were just kind of diving down into expenses, right? Not necessarily from a budget standpoint, more so trying to quantify and say, “What are expenses going to look like? ” How do we plan on using the wealth that we’ve accumulated in retirement and really just starting to build out that financial plan? And one of the things that wasn’t even on the radar when we looked at their particular budget was healthcare, right?
I mean, healthcare had been pulled out of their paycheck for all those years, right? And they were very focused on just, “Hey, this is what we need to live off of.” Well, I was like, “Well, hey, technically we got to add in some healthcare here to think about and say, ‘Hey, this is an expense you’re probably, you’re not seeing it because you’re living off what’s deposited in your bank account every two weeks. We need to make sure that we add that back in.'” Well, what does that expense look like? And that expense is very different depending on when you want to retire.
Well, we’ve had many conversations about retiring before 65 and what the healthcare landscape looks like there, how they’re very much tied to healthcare tax subsidies, ACA plans through Obamacare, and what those options look like, what the costs are with those plans. They can be really expensive and some of the benefits, really not all that great, much higher deductibles and things like that than what some families are going to be used to.
So we want to make sure we understand, well, how does that impact cash flow? How does that impact the plan? And probably more importantly, well, what planning opportunities are afforded to you before 65, and wanting to shop around for healthcare, and what do you need to be aware of? I mean, there’s a whole host of other opportunities, just maybe non-conventional healthcare plans that have kind of popped up over the years too that might work out for some individuals.
So pre-65 healthcare, but then also at 65, that magic age, you get Medicare, and what does that cost look like? How is your income going to drive your Part B premium? We talk about IRMAA all the time. We’ve mentioned it a couple of times here. Very rarely do I get through a podcast where I don’t maybe mention that IRMAA, that Medicare surcharge vault, because it is such an important factor, and a lot of it does impact quite a few individuals, and it can impact individuals that wasn’t even on their radar because maybe they did a big distribution for paying off their house.
And I talk about an individual I met with a number of years ago, wonderful lady. She was actually a nurse. Great. Actually retired, took out a big distribution out of her 401k, paid off her house. Great. No mortgage heading into retirement. Awesome. But how does that impact other things on the tax return I think is extremely important. So understanding those healthcare costs, what you’re going to do with healthcare, I think it needs to be a part of any big plan. And we want to make sure that we’re not tripping up, making mistakes in selection plan, even when Medicare, right?
I mean, during that open enrollment period or if you’ve had access to qualified healthcare, maybe you’re just enrolling in your part B and part A once you retire and you’re getting that initial opportunity to choose an advantage plan or a supplemental plan. I mean, there’s a lot that goes into that.
And once you kind of choose that option, you might not have as much flexibility down the road to change it depending on what path you choose. So understanding those levers, understanding how it impacts your situation, I think is a big thing to… A lot of retirees should probably have pretty high up on that priority list as you’re kind of approaching retirement and thinking about what are we going to do, what are we going to do for healthcare?
Walter Storholt:
Yeah. Back to your main point at the very beginning, hey, if I make one of these mistakes, it’s not the end of the world necessarily, but if I’m starting to commit two, three or four or more of these kinds of things in my portfolio, well, now we can start to see that cumulative effect of those mistakes really pushing us off track for where we want to be in retirement or at least what could have been, right? Even if you were going to retire successfully with the mistakes, like what could have been in retirement had you done things a little bit more organized or a little bit more efficiently from a tax standpoint or from a healthcare standpoint, what could you do with those extra hundreds or even thousands of dollars per month with better decisions? That’s what it comes down to.
Tyler Emrick:
So I’ll never forget. Well, when I got in the industry, my first planning job, I was talking to my mom and I was like, “Oh, you guys work with a plan”… She’s like, “We don’t work with a planner. What do we need to work for a planner for?” I mean, she worked in a machine shop all of her life, my dad was a bus mechanic. But over the years, and we’ve had those conversations, they didn’t have as much room for errors as they thought about their retirement and that picture. So those decisions were that much more impactful for them. So those families that maybe traditionally think, “Ah, I don’t need a plan,” or, “Hey, I’m not complex enough to have a planner.” I would argue that it says, “Hey, you have less room for mistakes, right?” So meeting with someone that’s going to dive into some of these to make sure that you’re maximizing decisions.
And when you’re not maybe maximizing those decisions, you at least know what you’re giving up so that way you can make sure it fits within your plan and what you’re trying to accomplish is all the more important. I’ve seen it with my family, my mom and dad, and I see it all the time with families that we kind of work with as well. So don’t assume just because you think you have a simple situation that a planner can’t add value and head off some of these issues. It might even be that much more important.
Walter Storholt:
Yeah. Great points. Well said. If you want to talk to Tyler and the great team at True Wealth Design, see if you’re a good fit to work with one another, if this has gotten your wheels turning a little bit and you’re like, “Yeah, I need to go through this kind of planning.” Maybe you had your hand raised for a few of those mistakes and say, “Yeah, I might be committing a few of those right now, or down the line I might be exposed to this.” That’s a great sign that you should work with a planner and talk a little bit more in depth about your specific situation.
You can do that by clicking let’s talk at truewealthdesign.com or simply click the link in the description of today’s show, schedule a 20-minute discovery meeting with the team to see again if you’re a good fit to work together. That’s all you have to do to take that first initial step, very easy to do it. Tyler, thanks for all the help today. Good discussion, and we’ll chat with you again soon.
Tyler Emrick:
Yeah, catch on the next one.
Walter Storholt:
Yeah, take care. Thanks for joining us everybody. We’ll see you again on Retire Smarter.
Speaker 4:
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.