In today’s episode, you’ll learn more about:
- How to navigate healthcare once employer coverage ends.
- Different ways to create and manage cash flow without a regular paycheck.
- How to decide where your retirement spending should come from.
- Tax-planning opportunities that can emerge after your W-2 income disappears.
- Why retirement planning shouldn’t stop with the financial numbers.
- How work, purpose, social interaction, and routine can change after retirement.
- Why your first year of retirement doesn’t have to look exactly like you planned.
Listen Now:
The Smart Take:
You’ve spent decades preparing for retirement. But what happens once you’re actually retired?
The first year of retirement is a major transition. Your paycheck disappears, healthcare works differently, your income may come from several different places, and your daily routine can change almost overnight.
In this episode, Tyler Emrick, CFA®, CFP®, walks through some of the most important financial and lifestyle decisions new retirees face during their first year of retirement.
Your first year of retirement isn’t about getting everything perfect. It’s about putting the right financial pieces in place while learning what you actually want this next stage of life to look like.
Go Inside the Episode:
0:00 – Intro
2:52 – Healthcare
7:05 – Cash Flow
10:58 – Don’t Miss the Window
15:24 – How Will You Spend Your Time?
17:14 – The Plan Can Change
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
You spend decades preparing for retirement. You save, invest, build a financial plan, figure out when you can retire and eventually pick that final day of work. But then retirement actually starts, and that first year can be much bigger adjustment than people expect. Your paycheck stops, your healthcare changes, you have to figure out where your spending money comes from. And maybe most importantly, you suddenly have a lot more control over how you spend your time.
Today, we’re talking about that first year of retirement, the final decisions you need to get right, some opportunities you don’t want to miss, and how to start figuring out what you actually want retirement to look like.
Walter Storholt:
Hey, and welcome to another edition of Retire Smarter. I’m Walter Storholt, as always joined by Tyler Emrick. He is a certified financial planner, a chartered financial analyst, and one of the wealth advisors at True Wealth Design. And a great episode today because we’re hitting a little area of the planning world that I think gets overlooked a little bit, Tyler.
Tyler Emrick:
Sure.
Walter Storholt:
People kind of ignore this because there’s so much emphasis on, “All right, can I afford to retire? When can I pull that trigger?” We then kind of ignore that like, “All right, well now what? The first year is here. What do I do now?”
Tyler Emrick:
Correct.
Walter Storholt:
And so we want to focus on how to make that kind of first year of retirement successful. It’s like anything in life that you spend so much time getting up to the finish line and then it’s like, you kind of want to take that break afterward.
Tyler Emrick:
It is.
Walter Storholt:
But a few things we need to still look at, right?
Tyler Emrick:
Oh, absolutely. And it’s one of my favorite things to check in with the families that I work with on just that first meeting after they pulled the trigger. Maybe they’re six months in, eight months in, whatever the case may be, and just seeing what’s happened over the last six to eight months. What are you doing? How are you spending your time? What new stresses do you have?
Walter Storholt:
So my neighbor retired last week. My neighbor retired a week ago. Oh gosh, that’s great. And I saw him and I was like, “Hey, how’s retirement?” He was like, “Well, it’s been like three days. It’s good, I guess. I don’t know. Still figuring it out.”
Tyler Emrick:
Extended vacation?
Walter Storholt:
He just looked at me like, “I don’t know. It’s just happened.” I was like, “Okay, sorry.
Tyler Emrick:
Yeah. We do need a little bit of time in there. So no, no, you got it. And it’s always fun conversations. They’re great, but just like anything, Walt, there’s things to be mindful of or things to just make sure that, as with any changes that you experience in life, as you get into it longer, you get more and more comfortable, things change, understanding that. So we figured we’d just do a little bit of an episode on just checking in, what should be top of mind in that first year, what to expect, that type of thing. That way you can just be a little bit better prepared for it, as with anything, right? Because obviously it’s a big life transition, to say the least.
So when I was doing the list and thinking through what I wanted to talk to, there were two things that came up to mind. And it’s just as anyone would think of. It’s like, well, what do I need to make sure I get taken care of? And healthcare, cash flow. Healthcare, cash flow. Well, those are two pretty big ones. And we talk about healthcare quite a bit here. It’s a big conversation that we have with the families that we work with because, well, a lot of times you’re using your employer coverage. Well hey, your healthcare is a lot of times taken care of for you, whether you’re a small business owner and you’ve done a lot of the work and you understand some of the intricacies of that choice, or hey, you work for the same employer, W2 employee and you’ve had your benefits kind of, hey, here are your two options and go with them. It’s a little different when you pull that trigger. And just as anything, when you have those choices, wrapping your arms around, well, what are the key drivers and decision points that you need to understand I think are extremely important.
So the big things would be, what are we going to be doing for our healthcare? Where are we going to get it from? And when do we have the option to change? A lot of times when we’re thinking about can we afford to retire, what goes into that is, well, what are we going to do for healthcare? But it doesn’t have to be a decision that’s kind of set in stone. Whether you’re on an ACA plan and doing individual healthcare because you are not reached age 65 yet, those plans have open enrollment windows, you can change them from year to year, so it is a decision that can be there perpetually. So thinking about, hey, I made this choice with my healthcare or ACA plan. Did it work? Is it working? Do I need to make adjustments? Have my health situation changed? Is something to always be mindful of, especially that first year as you’re trying to, again, wrap your arms around what options do I have here?
Certainly if you’re 65, Walt, maybe it’s a little bit less of a decision, but obviously Medicare does have some decisions that are going to be in front of you. And I think the big decision for our individuals that turn 65 are what plan are we going to choose to cover the gaps that your traditional part A and part B do not cover? So traditionally we would think of that as, do I want an advantage plan or do I want a supplemental plan, and what are the pros and cons to each?
Now that decision is one that a lot of times when you do first turn 65, you want to kind of at least put some thought into it and get that right because there can be some issues switching between plans down the road, especially if you choose an advantage plan first, it could be a little harder to go to a supplemental plan down the road. But as with anything, making sure your basic needs are covered, I think that healthcare decision is always something that first year is kind of top of people’s mind, because inevitably you’re changing. It’s new, deductibles might be different, copays, that type of thing, Walt. [inaudible 00:05:44].
Walter Storholt:
And you want to make sure that reality matched with the plan because that could be … A good plan is going to at least get you close, but sometimes you plan for it to be one thing and then when the bills actually hit, they might be slightly different because maybe a few months pass and rates change, just something, right? That always be a little bit different than what you expected.
Tyler Emrick:
Absolutely. Yeah. One of the things that I find, especially with the new individuals or clients that we start working with is a lot of times they don’t put, hey, during open enrollment while they’re working, a lot of them just kind of default to, “Hey, I just chose the best plan available to me.” The lowest deductibles, maybe it has the highest premium. So they’re just always have kind of defaulted to that, “Hey, I need the best coverage possible.” But when you get into retirement or even if you’re still working, we always stress with the families like, well, hey, you’re coming up on open enrollment. Let us run some numbers. Let’s kind of get down into the weeds a little bit on what are your options here? Do you have an HSA, flexible spending account? What two plans do they give you as choices? What are the premium differences? Do you really need that better coverage or not? Or should you switch to the better coverage?
So I think it’s something to where a lot of times we can go on autopilot while we’re working during that open enrollment time. And as we think about retirement and having quite a bit more choices available to you, it’s just the decision we want to make sure is kind of top of mind. So healthcare was like that first thing. And then I jumped right into cash flow and hey, it’s not rocket science, right? Cash flow. Well, a lot of times your paycheck’s gone. So how do we think through, well, what’s possible? Most of us have just gotten a biweekly paycheck or a monthly paycheck and that’s what you’ve gotten used to live off of. Well, the world is your oyster as you think about how you want to do it in retirement, especially for those individuals that maybe are delaying social security or don’t have a pension plan. “Hey, I’ve got this pot of money here. How do I want to utilize it? Do I want something monthly? Do I want something that, hey, I’ll live off my cash for a period of time, see that go down and then replenish as need be?” There’s no right or wrong on that wall, but kind of getting down into that and well, how has the last six months gone from my first year of retirement? Do I like spending down my cash? Do I not? Is it affecting how much money I spend?
Walter Storholt:
There’s a mental component to it, right?
Tyler Emrick:
Oh, 100%. Absolutely. Which is big, right? You could do this fantastic elaborate plan. Hey, you’re going to be perfectly fine. But then if you worked your whole life and you’ve been a saver and now you got to start using your money and you start seeing that cash go down, it’s a hard hurdle to get over. I’ve seen many families deal with it. Well, it’s definitely something to be mindful of because obviously we want to make sure that that wealth that you’ve created is being used whatever way that you want to. You don’t want to feel necessarily prohibited. You want to feel comfortable and confident in whatever lifestyle that you’ve chosen, and living within it. Empowering.
Walter Storholt:
It’s funny, I’ve had jobs in my life that paid weekly. I’ve had jobs that were the more traditional biweekly, and once a month.
Tyler Emrick:
Oh you’ve had all three? Okay.
Walter Storholt:
And even though small changes are like, oh, this is a very different feel only getting paid once a month compared to the weekly, across the spectrum. Interestingly, my wife is in a job where she gets bonuses, but they have the option to do them quarterly or once a year. You can just stockpile it and have it all come out at one time.
Tyler Emrick:
I see.
Walter Storholt:
I’m like, that’s pretty compelling to just really let it build up and then just one fell swoop. It’s not part of your normal planning to help you get through the year. It’s like now what are you going to do with this big chunk?
Tyler Emrick:
Correct.
Walter Storholt:
But that was a very different way of thinking about it. And it sounds very similar to what retirees can kind of face because, like you said, the world’s your oyster. Pay yourself once a year and then just live off of that.
Tyler Emrick:
Correct. Well, another big one with cash flow, I don’t want to geek out too much here, but how do you pay your taxes? When do you pay your taxes? You set up a monthly distribution out of your IRA and 22% of it’s going to federal taxes every two months, or every month, well, why would we not just do no tax withholding and then do it at the end of the year on a distribution from your IRA?
Walter Storholt:
Oh, interesting.
Tyler Emrick:
And then you let that money grow for the entirety of the year, or hopefully grow for the entirety of the year, and then you do it at the end of the year and you do it on a distribution out of your IRA account and the IRS does not care.
Walter Storholt:
That’s the creativity.
Tyler Emrick:
Now there’s some things you need to be mindful of, right? But little things like that, it’s like picking up pennies in front of the steamroller. Eventually that stuff kind of adds up and can add some real value into how you kind of think about it.
But hopefully you’re working with someone that’s, hey, done hundreds or thousands of these kind of plans and thinks about things like that. So that way they can say, “Well hey, is this going to work for you? What do you think about doing this?” And some families are like, “Yeah, that works out great.” And some are like, “No.” But at least you have the decision points that are presented to you and you make whatever decision’s going to be best for you.
But healthcare cash flow, got to make sure those needs are there. And then of course, the next point that I kind of brought up would be this whole, your first year or two of retirement can be very important from an opportunity standpoint as you think about options that you have to create more wealth. What I mean by that is take this scenario where you’re 62 or 63, let’s say 63, and you retire and you decide to kick the can down the road on social security. So you don’t have a pension, you don’t have social security coming in. The question becomes is like, well, how high do we want to take your income in this year? Sure, you got to cover your basic needs and we have a lot of options on, well hey, if you have a taxable brokerage account, a Roth account, an IRA account, a savings account, well, hey, all these pots of money can go towards that goal of getting what you need to spend. Which pot of money do we want to pull from? And then, hey, if we pull from our cash, for example, well, we’re not going to be realizing a whole lot of taxable income. Is that good or is that bad?
And I always tell the story of an individual that it’s been a number of years ago that I met with now, but I was sitting with him, I’ll never forget, and he’s pulled up his tax return last year and he’s like, “Look, I paid almost nothing in taxes last year.” And I’m like, “Oh, okay, that’s great.” And then I’m looking at his big retirement account that he has going, “Ooh, your RMDs are going to hit you and you’re going to be in the 22, 24% tax bracket down the road. Hey, we could have pulled out a hundred and some thousand dollars and only paid 12% in taxes on it. hey, you’re going to be staring at 22, 24% down the road. We might have missed an opportunity here to potentially redistribute those accounts in a way that helps you from a tax standpoint.”
And that window, a lot of times as you continue into retirement, that window kind of closes, right? Things happen. You start your social security eventually. Hey, you hit Medicare age and you have to worry about IRMA, that surcharge that we talk about all the time on the podcast, and increasing your Medicare cost. And then, hey, once you get in your early to mid 70s, now you’ve got required minimum distributions that you have to take from your retirement accounts, specifically your pre-tax retirement accounts that add income whether you want it or not. So a lot of times this first year, two, you have a lot of flexibility to say, “Hey, maybe I didn’t save a lot into Roth over my career, but I’ve got these one or two, this handful of years or one year window or whatever it might be to maybe reposition some of my assets into Roth to give me a pot of money that provides a little flexibility down the road.”
So that first year of retirement, hey, we got to, again, make sure those needs are met. That’s why we started with healthcare and cash flow. That was the first thing that came to mind. Well, what are we going to do with these? But then you can start, once you kind of got those met and feel comfortable with it, then the next question needs to go and say, “Well hey, what opportunities should I potentially take advantage of with me having such flexibility in my retirement plan before some of these other things start to kick in?”
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:
View that first year as not just a rest on your laurels year, but an opportunity year as well.
Tyler Emrick:
Oh, absolutely. Absolutely. Especially for those individuals that are retiring younger. Late 50s, early 60s, even mid 60s. Before those RMD years kind of start, you have probably the most flexibility to take income or manage that income. How are we going to capitalize off of those years? And how do all those levers between healthcare and income tax planning and RMD planning and all that stuff, how do those work in conjunction together? You still got to meet your basic needs here, but what other opportunities do we have in front of us? So don’t miss that magic window as you think about early in retirement.
And then the final thing, well, obviously, I think on the podcast we’ve probably talked about Maslow’s hierarchy of needs more than maybe any other financial podcast, right? But hey, this is the softer side of that retirement, right? But it’s like, hey, being very mindful and deliberate about how you’re going to be spending your time in retirement. It’s a challenge to go from working 40, 50, 60 hours a week to saying, “All right, hey, what am I going to do today?” So just like anything, if you don’t plan for it and think through that a little bit, you could find yourself just kind of lost, right?
Walter Storholt:
Yeah. That neighbor I was talking about was kind of going through that because he was like, “I don’t know. It’s only been three days. We’ll see. I don’t know.” And granted, it’s only been three days, but even he was already kind of like, “Yeah, we’ll see. I don’t know. Maybe I’ll go back and do consulting work or part…” He still had unanswered questions of how he wanted to spend that time and use it and all those kinds of things. So I thought that was interesting that even only a few days into it, he’s like, “Well, maybe I’ll still go back and do consulting. We’ll see, I don’t know.”
Tyler Emrick:
Yeah, no, absolutely. And this works different for everybody. I even think about my dad. My dad retired and then went back. And you kind of think about, well, what’s your social network doing? Where are you going to be spending your time? How do you want to do it? And how much enjoyment do you get from your work and your profession and what you’re doing? Yeah, and your purpose. Because again, we go back to that Maslow’s hierarchy needs. Once you have the foundation taken care of, healthcare, food, cash flow, that type of thing, now we start going up that pyramid. You start thinking about things that maybe you got a lot of that from working and from your profession. And the question becomes is, well hey, what are you going to potentially be doing with your time?
I think that kind of goes hand in hand too with my last point was give yourself permission to change the plan. Just because we thought one thing was going to happen … A number of times. Hey, I’ve had individuals come back to me after a year or two in retirement and be like, “All right, I thought I was going to spend this. I actually need this.” Or, “Hey, I thought I wasn’t going to go back to work, but I want to go back to work.” I love the story of an individual where I’ve been working with her for a number of years now. I think she’s been retired for about six years and she retired thinking, “I’m done. I’m done. I want to enjoy my retirement. I got a lot to do and things that I want to accomplish and I want to do it while I’m young and I’m able to do it.” I’m like, “Okay, yeah, that’s great. We’ve planned enough. Plan works. Let’s do it.” And literally over the last six years, she’s had more consulting and job opportunities come her way that she just couldn’t pass them up, but yet they were done on her terms and the time that she wanted to commit to it. And as those positions came up and gone, she was very thankful.
And certainly anytime you’re working and adding money to the plan, hey, that makes it great. But then also she’s getting up into some of those higher levels of that pyramid on what she’s doing for those companies. And one was her local church and so on and so forth. So I think you always think back to her and her story on like, hey, she went into retirement thinking one thing, and then over the course of living it and actually doing it she felt very comfortable about, “Hey, I’m going to change course. This is the route I want to go. Hey, this is a good opportunity. I’m going to take advantage of it.” And putting herself out there and she found a lot of enjoyment out of it. So it doesn’t always work out to plan exactly. That’s why we have jobs.
Walter Storholt:
The solid foundation of the plan though, the solid financial foundation allows you to then have that goal of being flexible in your plan in retirement and being able to adjust and change. And if you’re going back to work because it’s for some of these other reasons we’ve talked about, that’s great. What we don’t want is people retiring and having to go back to work because, oh, you retired too soon and you need the money, so get back to work.
Tyler Emrick:
Correct, correct.
Walter Storholt:
That’s what we don’t want to have happen, right?
Tyler Emrick:
100%. And we’re talking about that flexibility in the form of, hey, planning upfront and hey, thinking through how you want to live your life and always kind of reflecting on that and being open to change it.
But also, as you think about your finance and some of the decisions that you make, I always talk about building in flexibility into your financial plan, right? You think about some of the products where, hey, maybe this annuity would solve all your problems now and if it works out exactly the way that you expect it to it’s going to be perfect for you. But from my experience, very rarely does retirement or your financial situation work out exactly how you expect it to be, which is why when we start talking about those products that have high lock-in periods or things like that, that might be used to solve your perfect scenario now, our red flag kind of comes up and we want to make sure that we’re talking through those types of things because that is not building in that financial flexibility for you to adjust down the road because you’re locked into certain things. So I always talk about it in the form of a personal flexibility, what you’re doing, but also when you’re building your plan, you’re thinking about how you want to deploy your capital or what investments that you want to make, what type of financial flexibility are you giving yourselves down the road to adjust, and change, and go from there. So I think it’s very important on both sides of the coin.
Walter Storholt:
Yeah, thousand percent. Well, great episode today, Tyler. Appreciate the guidance here and it gives us a lot of important things to think about in that first year of retirement.
If you heard a lot of planning things today that you’ve not really though through or gone through with your advisor, or if you’re a DIYer and kind of have gone through these things on your own a little bit, and we covered a lot of ground today that you hadn’t thought about, that could be a sign that it’s time for a review of your financial plan and you can explore that option with Tyler and the team at True Wealth Design very easily. All you have to do is go to truewealthdesign.com, or click the link in the description of today’s show. Look for the Let’s Talk button and then schedule your 20 minute discovery call with an experienced advisor on the team. It’s that easy. Again, truewealthdesign.com, look for the let’s talk button or just click the link down in the description of today’s show. Schedule that time to chat, see if you’re a good fit to work with one another, and you can go from there. It’s easy to do and you can schedule at your convenience.
So check that out if you have any interest in exploring a conversation a little bit further and in detail about your specific plan. Tyler, good stuff today. Thanks so much and we’ll talk soon.
Tyler Emrick:
Yeah, had a blast. We’ll catch you on the next one.
Walter Storholt:
Sounds good. We’ll see everybody again next time right back here 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.
