I’d like to talk to you about something interesting tonight. See, everyone wonders where their money will come from when they go into retirement. Most of the time, it creates a lot of stress.
We’re going to go over some of the basic portions of income planning in retirement. We’ll start with the basics and then move on to more advanced strategies since everyone should have some kind of income when they retire. Everyone talks about Social Security first and foremost, but how much do you know about it? You know when it’s due, how much you’ll get, and what it’s based on. If nothing else, there are rules.
On the Social Security website, you can sign up for an account and find out how much money you will get at different ages when you might retire. It will also give you earnings history. This is extremely, extremely important. Look at it. Check it out because there may be mistakes or blank years when you know you filed a tax return and paid Social Security taxes.
But take a look at that, right? Look at how many years you’ve worked and how much money you made that was reported to Social Security. Then look at the next page, which tells you how much money you will get if you retire at age 62. How much will you get if you retire at your normal age, which for most people listening here is 67, or if you wait and don’t retire until you’re 70? Right now, if you wait from age 67 to age 70, you get almost an 8% raise.
That is important. And especially when you’re talking about survivor planning. If you are married and have two Social Security benefits, and one of you made more money than the other, it is possible that one of your benefits would be much higher than the other. When you retire, your family will get two Social Security checks. But upon the, I’ll say the spouse earning the higher amount of Social Security if they die first, there’s a provision that allows the surviving spouse who has got a smaller Social Security to step up to the higher Social Security.
Not two Social Security checks, just one, but at least the higher of the two. So, you need to know how that first choice was made. You have to talk to a person that has experience in Social Security planning and can explain to you maybe you shouldn’t retire right now because it could affect your spouse even if you are more concerned about longevity. Because, as a simple rule of thumb, if you take Social Security sooner rather than later, the point where you break even is usually 13 to 14 years later in times of high inflation and high interest rates, which is where we are going. The time limit gets shorter.
So, it takes less years to break even. We must think about all of these things, and we use calculators to help us figure out what to do. And very important to people that aren’t aware that decide all, I’m going to take Social Security, right when I’m available at age 62, I’m going to start taking my money. Well, it’s number one, and it’s gone down a lot. You won’t get a full dollar’s worth of help.
And if you keep working, it’s a trade-off that you can only make X dollars. We’re going to do an entire presentation on Social Security and Social Security only so you understand all the pluses and minuses. So, if people don’t have a pension, the first thing they think about when they retire is Social Security. If they have a pension, that’s a different thing. That’s a benefit that was promised to them as an employee. Who are the regular people who get pensions?
Historically? People like that who work for the government. Some companies still have pensions. Some companies have pensions that have already been paid out. So you may have worked there long enough or earned enough years to get a pension.
It could be a case of “term vested.” You no longer work there, but you have a stake in the company. And when you reach a certain age, you’ll get this money. But it’s a pension, so every month someone else will send you a check. You never really paid into the pension, no matter what you did.
Most pensions come with choices, and when you start to use them, you must make choices. The easiest way to explain it is that a pension calculation lets you get – I’ll use simple numbers: a dollar if you take it, and it stops if you die. Then, you start breaking that $1 into smaller pieces. If you say, “Okay, if I die, I want to have,” your spouse will get half. Maybe you’ll get rid of 10% of it.
If I die, my wife will get the same thing I have. That might cut it by 15%, and then you can add pop-ups. If my wife dies before I do, I go back to 0. We have to look at all kinds of pension plans. Sometimes there are only one or two types of pension options, and sometimes there are six, seven, or eight.
But that is another way for the person to make money in retirement. They had planned to do that. That’s why they may have worked where they’re working. So, maybe they did what they had to do in the past. They worked for the government because they would get a pension.
Even though it may not seem like a lot in some cases, if a person gets $2,000 a month for the rest of their lives, that’s the same as what I’m going to use today as a 5 percent distribution, right? That $24,000 or $24,000 would be the same as having close to $500,000 in another type of savings account that earned more than 5%.
That will need to be changed, but that’s fine.
When your defined benefit pension sends you a check every month, you know how much money you’ll have and can plan for it. So just hear me out. Social Security is there for you. With Social Security, you’ll know what you’re getting. monthly amount of X dollars.
The pension is x dollars per month. And now we’ll talk about all the other ways to make money in retirement. Most people now take part in something called a “defined contribution plan” or “401K plan.” This is how money is put into an account. Some kind of investment account could be fixed, or it could be variable, or it could be anything of the sort.
But you’re putting money into a retirement account, and in some cases, your employer will also put money into that account. A matching contribution is what they call it. And even if things are going well, they might make a profit-sharing contribution. You now have a retirement account. It is covered by the laws about pensions.
So there are limits to how much you can put in different things in nature. But now you have a qualified retirement account that you can use in the future. Right now, the government says that you have to start taking money out at age 72.
You’ll get a payment once a year or once a month, but the math is already done. Now you can take out more, but after you turn 72, you have to take what is called a “required minimum distribution,” and you have to take at least that amount every year after that. And as your life gets shorter, the amount you get increases. And if you have good years with your investments, the distribution will follow the same rules, since it’s a percentage of the account now, just like a DC account or an IRA, if you have one. Right now, we have Roth IRAs.
Many people are taking part in them. They have slightly different rules, but they are both for saving for retirement. By definition, the next level is just saving money or, better yet, saving money and investing it. I call this “non qualified money.” This is money that you have started to put aside after you already paid taxes.
And if you make money while this money is in these investments or bank accounts earning interest, you have to pay taxes on that interest, dividend interest, capital gains, or whatever it is. But in the end, it doesn’t get tax breaks like an IRA or 401K. You have to save some people who have most of their money in their bank accounts. Business owners usually have big non-qualified savings accounts because they may have sold their business at some point and put a lot of money into an account. So that’s the end of their lives.
Every year at work, I say, “My business is my retirement. I’m going to sell it.” Some people say that their homes are their retirement, but that’s not true. You need a place to live, and sometimes a second house can be that. And this is kind of related to the next problem that some people have. They have their own homes.
Sometimes it’s just one rental property in a vacation resort, but that property gives them rental income, which helps them pay for their retirement. People sometimes live in houses with more than one family or have rental properties where they get rent from each unit. That will be their income when they retire. Then there are many other investments that could pay off. That is a whole other picture.
But this is how you begin to figure out when you can retire. How much money can I expect to make and where will it come from?
The next video we’ll talk about is about costs of retirement. Costs sometimes go down when you retire and sometimes go up. But if we go back to the original goals, like if I want to die with one dollar in my bank account and spend everything else on myself or things I enjoy, sometimes you can plan it out pretty close to that. I played golf with a someone over the weekend. We talked about many different things, and he asked a lot of questions.
He says, “I don’t want free advice.” I said, “That’s fine. This advice is free, so you can take it or leave it.” But we became friends and shared information. We’ll play golf again, because I can’t tell you if he likes me or not based on whether he trusts me or not. It looks like it, but by the end of 18 holes of golf, he knew me pretty well, which is why we shared information. What am I trying to say?
This person needed help, so we talked about other ways to make money, since his wife isn’t sure about their retirement, even though he is. Not his wife. Money is a worry for her. From what was said, it doesn’t sound like they have to worry about money. And I just told him what it was and said, “Let’s sit down and go over it.”
Let’s do some analysis, let’s do some projections. Let’s make sure you have the right investments for the money you have and make some choices. And he is in a unique situation. I just asked him, “Do you rent out your vacation home, which is worth a lot of money?” He said yeah.
He said, “I get $5,000 a week in the summer.” So I said, oh. I know where the house is, so I don’t think he rented it. I don’t think he rented for more than 6 or 8 weeks. But give it some thought.
If he rents out that house for eight weeks a year, it gives him an extra $40,000 in income.
That’s not a bad way, tack onto that RMDs, which are in addition to that Social Security. Regarding Social Security. He and his wife add any other money they get on top of that, and it’s fine. I told him, “Let’s face it, that’s pretty simple.” You’re still accumulating.
You’re not spending down your assets. And he said, we’re still making money overall. I say “bell curve.” At some point, you stop adding to your assets and start using them. So, that’s math.
It’s just a guess. When will it be finished? So, we just talked about how to make money when you retire. If you have more questions, contact me. Joe 914-46-8186.
The initial conversation, of course, is free. It’s just a short talk. If you want me to look into it more and make a projection for you, then you have hired me as your advisor. And that’s when we start to put together a professional services agreement, and I become your actual fiduciary, because I have to have your best interest at heart.
That’s just my job. Again, Joe at 914-46-8186 or Joe@agingissuesmgnt.com
Recent Comments