Are You Slowly Boiling (Or How to Take the Temperature of Your Retirement Picture)

You’ve probably all heard the old adage about boiling a frog. As a southerner, I love a good colorful metaphor. The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, the frog will not perceive the danger and will be cooked to death. Okay, so that’s not a pretty picture, but it could be an apt representation of what is happening with your current retirement plan. I’m amazed how many people don’t do the math to make certain their financial path gets them to where they want to be. Wouldn’t it be a shame to work all your life saving for retirement and then when retirement time rolls around not have enough money to live the lifestyle you desire?

Since the 1980s, you have been told to put money in 401k plans or IRAs to defer the “terrible” tax we have to pay. Most people have blindly followed this plan without regard to the income tax that they will be required to pay at a later date and at a rate required by the IRS (that could potentially change at any time). You look around and “everyone is doing it.” You check your balances from time to time, but the changes are gradual and like the frog as the water heats, you don’t notice the end result on the value of your savings. I’ve seen individuals blindly follow a financial adviser’s advice that, “you have enough money to retire.” Are you aware that the safe withdrawal rate from your 401k is 3% annually? Let’s say you have a million dollars in your 401k. The safe withdrawal rate of 3% would only produce $30,000 a year, and that’s before taxes. Is $30,000 minus income taxes enough to maintain your current lifestyle?

Is this the situation with your financial planning? You have just been following the “What I’ve been told” approach—“here’s what you need to do for 30-40 years and then you can retire.” Most financial advisors endorse this approach, so you have put your head down and dutifully socked away cash. Have you recently looked at your financial plan closely to see if what you want or expect to happen is actually going to happen? What are the financial consequences of your current plan? Are these the consequences you want? Are there ways to better maximize the financial outcome for you while minimizing what the government takes from your retirement accounts?

In retirement planning, I’m afraid the herd mentality has taken control. Many people find it difficult to step outside their comfort zone because “everybody is doing it this way.” Because everyone’s doing it, doesn’t mean it is the best thing for you. Is everyone in your tax bracket? Have you really looked at the outcome or what the outcome will be of your financial plan? Will you have enough to spend and maintain your current lifestyle?

Recently I talked with someone (let’s call him Bill) who discovered that his financial plan did not provide the outcome he wanted. His safe withdrawal rate did not give him much money to spend. Bill met a new advisor by chance. That advisor asked him three questions (more on that in a minute), and Bill didn’t know the answers. The advisor sent him out to find the answers to the questions before they met to discuss his plan.

Bill asked several of his colleagues what the outcome of their retirement plans would be because they were using the same retirement strategy he was. All of the colleagues Bill questioned were within fifteen years of retirement but had no idea how much money their plan would provide when they retired. When he asked his fellow colleagues and workers how the process would work, they all replied, “Well, you won’t spend as much in retirement.” He inquired further, “what if I want to spend more?” The others said, “oh you just won’t.” Bill couldn’t believe this global declaration by his peers. It didn’t ring true.

Typical advisors offer four reasons to illustrate why you will not spend as much money in retirement:

  • You won’t have your kids to support.
  • College education for kids will be completed.
  • Your home will be mortgage free.
  • You won’t spend as much on car expenses because you aren’t driving to work.

These situations may be true, but what about travel, what about your fun hobbies, what about spoiling the grandkids? Does the golf course reduce green fees and cart rentals just because you’re retired? Yeah, you might get a senior discount, but you will still pay a fee to play, and you may want to play more rounds per week if you have the time. Do you want to travel and experience the United States or maybe international countries? I like the proposal, “Grandkids are your reward for not killing your kids!” I know so many grandparents that want the ability to spend money on their grandkids. All these adventures require money. I didn’t even mention healthcare, vision, or dental costs in retirement. I’ve always said that it is easier to spend more money, but it is so much harder to go from spending more money to spending less money.

If you go from earning $100,000 of spendable income in your working years, and now your financial plan provides $40,000 spendable income, will you be happy? My answer would be no, and many other retirees feel the same. Tragically too many people don’t realize this consequence until they arrive at retirement!

I had a conversation with a client last month who said he had a $1 million in his 401k and thought that should be enough for him in retirement. I asked, “Do YOU have $1 million?” He replied, “Yes” and I asked, “What about the IRS’ portion of your account?” “Oh yeah,” he said. I questioned, “Do you realize at today’s tax rate (the lowest in years) the IRS would get 32% of your retirement pot? You really have $680,000 which would produce $20,400 yearly income BEFORE taxes at the safe withdrawal rate.” He was stunned. Many individuals fail to do the math for their retirement accounts until it is too late.

But, back to Bill’s story. Once he found his answers to these three questions he was appalled and knew he had to make a change.

  1. Do you expect to earn more in the future?
  2. Do you want to maintain your current level of lifestyle when you retire?
  3. Do you think taxes are going up in the future?

Like Bill, now is the time to see if you’re on the right path. Is your plan going to give you the results you desire? If so, and you know that for certain, that’s awesome for you; what peace of mind you must have! But if your plan won’t give you the cash flow you desire, what better time to make a change than now? Instead of having 40 years, maybe you will only have 20 years to save but what if you can build the wealth you want in 20 years by choosing a different path?

Following the crowd by adopting the latest technology craze might be appropriate, but following the crowd for a financial plan that you don’t understand or have any idea of what the outcome will be is a terrible idea. We tend to be a pack mentality society and need the approval of others. It’s amazing to me I can provide professional financial advice with 20+ years of experience and training, but some people will take investing advice from their neighbor, Uncle Joe, George, or whomever, with no expertise. And they will get incorrect advice. The pack mentality leads many people astray.

In our financial conversations, we simply ask you to do the math. Calculate what you’re doing now. Even if you use the current numbers on the tax side, you will be very surprised at what deferring the taxes does to your income. Will deferring your taxes until retirement actually put you in a higher tax bracket? What will the tax rate be in your retirement years? Are you paying fees on money that you won’t even get to spend because the IRS will get its share? Will you have to pay taxes on your social security?

We’re also calculating taxes with today’s tax rates, and today rates are as low as they have been in years. What do you think taxes will do with $23 trillion in US debt and the number of workers supporting Social Security and Medicare diminishing? Wouldn’t it be nice to work only if you wanted to and not because you lack the funds to maintain your lifestyle?

In today’s global economy playing the market is extremely difficult. Yes, we’ve had a great market the last ten years. But after seeing the devastation of the market crash in 2008, I don’t want to subject my clients to the risk. When talking with new clients this year, I’m meeting people who are just getting their portfolios back to their 2007 levels. In retirement, do you have a decade to recover? If you’re withdrawing money to live on, and then you lose 30% (or more) of your money, how would that affect your retirement lifestyle? Do you have peace of mind or are you worried about running out of money?

If you could take away market volatility, take away the taxes on your accounts and still retire with the lifestyle that you want, would it be worth a conversation? A good ethical advisor will listen to your situation and show you the consequences of different financial scenarios. You know your tolerance level for risk, you know your anxiety level, and you know your love of your lifestyle. Once you’ve been presented with the options, you should be able to make a decision that is comfortable for you. I can give advice, but I think the best advisors show you the options available for your specific situation and let you pick what makes you comfortable. Make your own path and don’t blindly follow the pack!

So are you just sitting there with the frog in the pot of water as it heats up not even realizing the peril? Or are you like Bill ready to make a change for the better? Check your answers to the important questions:

  1. Do you expect to earn more in the future?
  2. Do you want to maintain your current level of lifestyle when you retire?
  3. Do you think taxes are going up in the future?

Once you have your answers, let us help you do your math.