Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered Representatives Securities offered through Cambridge Investment Research Incorporated, a broker-dealer, Member FINRA/SIPC, Investment Advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate. James is joining me again this morning. We were talking on the way up here. James, it’s August already. It’s hard to believe we are to that point and the calendar that’s looking right in front of us says August of 2020. Can’t believe we’ve made it this far.
James Nelson:
I know, where’d the summer go? It’s hard to believe we’ve made it this far and yeah, school’s going to be ramping up here before long it sounds like. So yeah, we flew right through the summer.
Nate Kreinbrink:
It’s been a crazy, I guess you could say, 2020 so far. And hopefully with things moving forward, like you mentioned with school, hopefully a lot of those things, those questions and uncertainties can iron themselves out as much as what they can and get things back to the decisions that people make.
Nate Kreinbrink:
And as we get closer to that, I know my wife Ashley is a teacher, and she’s been out in her classroom the last couple of days and trying to get things ready. And all the new things that have to go into place with all that, it’s definitely, I think, continuing to be that word, interesting and will continue to be prevalent moving forward, I think.
James Nelson:
Yeah, a different environment and I think all the teachers have in the back of their head that this might be temporary, too. If things ramp back up or somebody gets sick at school, things can be shut down, too. So yeah, it’s going to be an interesting year for sure.
Nate Kreinbrink:
Hard telling. But as we were saying, as far as time flying by, had a lot of the last couple of weeks, I would say particularly, of talking and sitting down and meeting with people, conversations with people over the phone, with individuals that are looking to possibly be retiring in the next six months to 18 months or whatever and starting to have that conversation with them as far as them having questions and saying, “What do we need to look for? What do we need to do? What am I overlooking? Am I ready to be doing this?”
Nate Kreinbrink:
A lot of times it’s just people thinking, “I’m going to retire. I’m walking out the door and things are going to just fall into place.” Well, there’s a lot of different little checks that you need to make sure that you can check the box on when you’re starting make that decision that I think people a lot of times often times overlook. And we want to make sure that people are prepared so when they do finally walk out the door of that place of employment for the last time, they’re confident that everything that they need to have in place is already done.
James Nelson:
Yeah, and that’s our planning process, is trying to help answer a lot of those questions before somebody walks off the job. If somebody comes in and says, “I’m retiring next week,” not a whole lot we can do if their mind’s already made up. They’re at the end of the road. Their employer already knows. At that point, it is what it is, unfortunately.
James Nelson:
But people that have a little bit of a lead time, like you said, six months, a year, year and a half, whatever the case may be, there are a lot of things that we should be doing and conversations we should be having prior to the end date. And that’s our planning process. Not to say that we’re going to throw up our hands and say, “No, you can’t retire,” but it helps answer a lot of these questions. And it helps give a client an idea, “Hey, can I do it? Am I going to be in good shape? Am I going to make it to the finish line?” type thing.
James Nelson:
It’s really important whether that’s the investments, the tax planning, Social Security planning, Medicare planning, health insurance planning. If you’re not of 65 age, if you’re in your low 60s, around 60, obviously there’s going to be a period of time where we have to bridge a gap with health insurance costs. So running those numbers and seeing what that looks like, I think a lot of people are blown away by that number. When we’re talking expenses in retirement, it’s healthcare and taxes that tend to be at the top of the list as far as largest expenses throughout retirement. So a lot of good conversation pieces that need to happen. And if they’re not happening a person could potentially be in the dark on a few things.
Nate Kreinbrink:
Right and I think that one point that you just mentioned there, James, was healthcare expenses. That’s one little piece of the puzzle that I think people oftentimes overlook or underestimate. Where they’ve had their insurance through their place of employment through their whole time, they may pay a little bit, but they don’t realize the chunk that their employer is actually paying through that whole time or whatever. Now, all of a sudden they get to retirement. They’re pre-65, so they’re not yet quite Medicare age. They have to go out into the marketplace to be able to find some insurance to cover them up until age 65.
Nate Kreinbrink:
And when they start having to pay that whole monthly premium, a hundred percent out of their own pocket, again, I think they’re blown away a little bit. A lot of times it potentially is a deal breaker, as far as being able to make that decision at retirement. If we’re looking to do all this planning, to save early, to be able to retire earlier, that’s just going to be a longer time period until we get to age 65, that we’re going to have to fund our own insurance before we get to that Medicare age. So making sure that we are accounting for that and not just accounting for it, but being realistic as far as what that’s going to cost.
James Nelson:
Yeah, exactly. And we talk to clients all the time. It was only a couple of weeks ago where I had a couple that were on the doorstep of $2,000 a month in their early 60s, almost a thousand a piece, not quite. That’s a huge number of when you tack on living expenses and everything else on top of that. We’re starting to get to a high monthly withdrawal rate in a pretty short amount of time if we’ve got the insurance to worry about. So yeah, that’s a huge item.
James Nelson:
The other one is taxes. I think taxes get overlooked, too. Sometimes people just get used to this is what I made, this is what you owe, see you next year type conversation with a lot of accountants. And that’s usually done in February or March or April and there’s not really any tax planning going on. There are some things that people should be considering ahead of retirement, just to position assets in a way that are going to be most advantageous for you in retirement.
James Nelson:
So that doesn’t mean you don’t pay a whole bunch more in tax, but that may mean fund a Roth IRA for a couple of years ahead of time. Maybe at least open that Roth IRA with something, some dollar amount, to get that five-year clock started, if that’s an issue. There’s just some things that need to be talked about, looked at, potentially implemented before retirement. Having these conversations earlier rather than later is a big item.
Nate Kreinbrink:
Right and I think what goes hand in hand with that is it’s very common for people to have the bulk of their liquid and savings of assets in tax deferred accounts. So traditional 401Ks, they’ve just been taught to continue to just pump money into the pretax portion of my 401K. Any employer match went into the pretax portion anyways. So they’re walking off the job. They have this big bucket of money in a pretax bucket. Well, what they don’t realize is that at some point they’re going to have to settle up and start paying taxes on that. And if they don’t necessarily need that income at age 72, they’re going to be required to take out a minimum distribution every year or an RMD. Well, that RMD that’s coming out is taxable to them.
Nate Kreinbrink:
And depending on the size of those assets that they have, that they have to take that amount out, a lot of times it’s pretty sizable. And you add that on top of Social Security benefit, you add it on top of any other pension that somebody may have and what it binds a lot of times is it ends up pushing those people into a higher tax bracket. Not just from a tax standpoint, but it also pushes them into another bracket potentially for Medicare. So what they’re doing is, all these tax savings that they got throughout the year, they’re really having to suffer for it later on. That’s not just for them, that’s for a spouse or anything going into it.
Nate Kreinbrink:
So that time when you officially say, “I’m done. I’m retiring,” to maybe the time we take Social Security, that could be a window of opportunity where we’re in a low tax bracket year. Let’s get as much out of those tax deferred buckets as we can. Fill up those lower brackets as much years as we can. You may not need to spend it all, but as James said, take it out, convert it over to a Roth. Still get some of that benefit. So those are the plannings in those ideal years from a tax planning standpoint, that we’re paying more taxes than we have to in that year but we’re saving from paying more later on.
James Nelson:
Well, in speaking of Social Security, that’s the last item I was going to touch on. And that’s, what does working an extra year look like? Or what does delaying drawing Social Security look like? Nate, you harp on it all the time. Your retirement date and the date that you draw Social Security do not need to be the same day. A lot of people just say, “Hey, I’m retiring. I’m drawing Social Security. That’s that.” Well, maybe that’s a good idea. Maybe it’s not.
James Nelson:
Looking at those numbers and running those numbers, not just for one individual, but if it’s a couple, for both individuals and what strategy makes sense. Can we have one draw now and one wait an extra year so we’re not taking that reduction? Can we coordinate these strategies to create the best outcome longterm for a couple versus just looking at it today and saying, yeah, I want to put my hands on that money? Because that’s everybody’s instincts. We would be no different. That’s what everybody wants to do and that feels comfortable, but not necessarily the best strategy when you’re looking over a 20 or 30 year time horizon.
Nate Kreinbrink:
Again, there’s a lot that goes into it and I think a lot of people just think it’s investments and allocations or whatever. Not taking anything away from that, because that time period that we’re talking, those couple years before retirement, the year of retirement, a couple of years after, your rate of return has the biggest impact in that window just because normally your account size is the biggest at that time. Whereas it’s a whole different dynamic from when you first started saving, when contributions had more of an impact rather than potentially rate of return just because of account size.
Nate Kreinbrink:
But want to make sure we’re taking a look at that. One other option for people, and it’s allowed for them, they’re over 59 and a half, are in-service rollovers, being able to take a portion of your money, roll it over to an IRA. Why someone would want to do that? Maybe more control, more investment options, things along those lines. Is it a one all/do all for everybody? No. The money that’s in 401Ks, oftentimes you can have loans with it. IRA accounts, you cannot have loans against it.
Nate Kreinbrink:
But wanted to keep some of those things in mind because as people get closer to it, they have ’08, ’09 in the back of their mind. Taking that big hit right before they’re wanting to walk off, they don’t want to do that anymore. They can’t do that anymore because that means either one, they’re entering retirement with less money, less assets than what they thought they did or they’re working another couple of years.
James Nelson:
Yeah, my retirement date just got pushed back a couple of years. That’s not a good scenario at all.
Nate Kreinbrink:
So a lot of stuff to go over just because we’re going to make that decision and we want to be as prepared as we can. We walk people through this process on a regular basis. So if you’re having these questions, you’re getting to this timeframe in your working career, give us a call. We’d be happy to sit down with you and go through some of these. Oh, I did want to mention real quick before we run out of time that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of August will be donated to the Food Pantry at the Associate Benevolent Society in Clinton. James, thanks for joining me again today.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, Nate and James with NelsonCorp Wealth Management bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered Representative Securities offered through Cambridge Investment Research Incorporated, a broker-dealer, Member FINRA/SIPC, Investment Advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information visit our website at www.nelsoncorp.com.