Retire Eyes Wide Open: Season 1 Episode 7

Introduction:

Welcome to Episode 7 of Retire Eyes Wide Open. I’m Scot Landborg. On today’s episode, the “REWO” Test. Are you ready for retirement? This show is all about making sure you don’t go into retirement with your eyes closed, but how can you be sure your eyes are open?

We’ll review the Retire Eyes Wide Open test. 13 questions that will let you know definitively if you have your eyes wide open. We’ll review the week’s news in the Money Rundown. We’ll talk about the best thing I saw this week. And our Scot Strategy Segment and Listener Questions are all about retiring with your eyes wide open.

This is Retire Eyes Wide Open!

Money Monologue:

Today, the “REWO” Test! The Retire Eyes Wide Open Test. How do you know if you are retiring with your eyes wide open? I had someone I care about tell me with confidence that they are retiring with their eyes wide open. But how do you know? What does it mean to retire with your eyes open? What does it mean to have enough confidence to know you have enough information to make those difficult retirement decisions?

We created a test. 13 yes or no questions that will clearly tell you how informed you are. You’ll know with certainty if you are retiring with your eyes open. Are you going into the biggest financial decisions of your life with your eyes closed? I sure hope not. Let’s go through our top 13 questions. Again, these are yes or no questions. You’re going to get a score at the end. Answer them yes or now and you’re going to know with confidence how ready you are for retirement.

1. Have you interviewed multiple financial professionals?
   This is an important one. I don’t care if I’m the first person you’ve talked to. Interview multiple financial professionals because financial advisors are very different in how they manage money, in how they manage taxes, how they manage your assets and how they approach retirement. You want to make sure that you’ve got one that you’re comfortable with and one that is competent enough to handle the multi-faceted aspects of retirement.
   
2. Do you have a written income plan for retirement?
   This is a big one and I’m surprised at how few people have an income plan. What does that mean? Well, you want to plot out for the next 30 years. What’s your income projection going to be in retirement and in the future and where is it going to come from? Is it coming from social security? Is it coming from IRA’s? Is it coming from joint accounts? Pensions? You lay that out on a spreadsheet or various financial planning software to make sure you’ve got clarity on when your income is going to be coming.
   
3. Have you considered multiple social security strategies?
   This is a big one. Social security is not as simple as turning it on at 62 or not as simple as waiting until 70. Have you reviewed multiple ways to take out your social security and how that impacts your income plan?
   
4. Have you stress tested your current portfolio holdings?
   The portfolio you have today may not be the same portfolio you had ten years ago or thirty years ago, but is it ready for the next recession? We’re in the longest bull market in history. We’re ten years into this thing since our last recession in ’08. How ready is your portfolio to handle the next big pullback? You need to know the answer to that question because when you start pulling income from retirement and you’re exposed to too much risk, you might run out of money.
   
5. Is your portfolio keeping pace with the market?
   This is another important yes or no question. And one of the ways to know it is to look at how your portfolio compares to the S&P 500 Index or some other index that’s going to be considered your benchmark. It’s important not just that your account has been growing in value. Most everyone has been growing in value over the past ten years. Have you been keeping pace with the market? S&P 500 over the past ten years up over 300% since 2008. How far has your account grown?
   
6. Have you explored strategies to improve tax efficiency in retirement?
   This is another big one. How are you going to pull income in retirement? Are you being tax advantaged and tax efficient in how you’re pulling your income? And if you have no idea what I’m talking about then you can answer this question “no” and look into it a little bit further to make sure you’re ready for retirement. It’s not just what you make, it’s what you keep. And tax efficiency is a big critical component of proper financial planning.
   
7. Have you planned how social security and RMDs will impact your taxes?
   This is another big one. Social security has different break points with where your income is. Where your income from social security could be tax free, or only half of it is taxable or only 85% of it is taxable. Make sure you know where those numbers are and how they can impact your taxes. Same thing goes for minimum required distribution. Once you turn 70 ½, you’re forced to start pulling money from your IRAs. How is that going to impact your taxes and does it make sense to maybe make those withdrawals a little bit early?
   
8. Will your mortgage be paid off or housing expense be planned for?
   Many people when they retire have a goal of having their mortgage paid off and a lot of people do it. A lot of successful retirees figure out a way to pay off that mortgage. It’s a lot easier to meet your income goals if your expenses are lower and not having that mortgage sure helps. If you are going to have a mortgage, maybe you don’t own a home at all, how is your housing expense going to be paid for and are there strategies to help produce it? Could you downsize? Could you move to an over 55 community? Can you move out of state? Can you do a reverse mortgage? These are all different things you want to explore to make sure your costs are under control in retirement.
   
9. Have you explored multiple investment philosophies?
   A lot of people don’t necessarily understand this question. What do I mean? Well one of the most common investment philosophies today is a passive investment philosophy. Buy and hold. Buy indexes and hold them. But there’s a whole bunch of different investment philosophies. How much international should you have? Are you subscribing to Tony Robbins’ investment philosophy? Maybe Suze Orman’s? Maybe Warren Buffett’s? What investment philosophy do you subscribe to? Are you an active manager? Are you a passive manager? And have you interviewed different advisors that have different approaches to how they manage investments? If you get educated, if you get your eyes open, you can make the best decisions about how you want to move forward with your retirement assets.
   
10. Have you evaluated multiple annuity strategies?
    This is a controversial one. Some people hate annuities. But I would challenge you, even if you hate them, you should know the best ones that are available. I’d say 1/3 of the people I work with have no annuities at all. Either they’re just not appropriate for them or they don’t want them in their portfolio and its okay! You may be in a situation where annuities aren’t right for you either, but it’s good to know how they might fit in your portfolio. Where we best see them used is as bond alternatives or as ways to supplement your income in retirement. You should at least know what the top couple of options are. If you use them or not is a different story. But make sure you've evaluated your options.
    
11. Do you know the fees you are paying for your investments?
    I’m surprised how many people don’t know the fees that they’re paying. Often if you have a 401k at some of these discount brokerage firms, your fees could be very low, but other firms have varying fees. Some higher than 2%. Make sure you really understand what those fees are. You don’t have to go necessarily with the person who has the lowest fees. But you have to understand what the fees are and what is the value you’re getting for that fee and is that fee worth it.
    
12. Have you explored ROTH conversion strategies?
    Another yes or no question. This is a big one. A lot of people build up their 401ks in traditional IRA accounts but they neglect their ROTH accounts. Now IRAs and 401ks, they go in pre-tax but eventually when you pull the money out, you have to pay taxes on it. ROTH is after tax money. It grows tax free and you can pull it out tax free. And ROTH conversion strategies may make the most sense from the moment you retire until the day you turn 70. Because once you turn 70, all your income is on, all your pension income, your social security income and you’re being forced to pull money for required minimum distributions from your IRAs. So ROTH conversions may best work between the time you stop working until you’re 70 and maybe even after that depending upon what your assets look like and what your overall goals are. At the end of the day though it makes sense to think about. Even if you’re only converting $10,000 or $20,000 a year, it really adds up over time. $10,000 over 10 years is 100 grand. Over 20 years is $200,000. That’s all in a tax-free bucket.
    
13. Is your estate plan up to date?
    I’m surprised how many people, probably 75% of the people that I meet with, have no estate plan at all. It’s not because they’re not smart people, it’s not because they aren’t successful. They don’t take the time to do it. And with technology today, there really is no excuse. It’s easier than ever to sit down and complete an estate plan. Estate planning has also gotten a lot easier. It used to be a big deal to think about what kind of taxes you were going to pay if you passed. Under the new tax bill, you each have over $10 million exempt from estate taxes if you pass. So it makes estate planning a lot easier. Make sure it’s something that you get taken care of and addressed.
    There it is. There’s our REWO Test! Yes or no answers for 13 questions. Hopefully, you answered them all yes. And if not, how can we get you to a yes? They are all important. This is one of those tests you want to keep taking until you get them all right.

Now if you answered 12 of them correct, you’re really ready for retirement. If you answered 10+, you’re in pretty good shape, higher than average, but still some work to do. 6-9 correct is average, but a lot of work to do – a lot of questions to be answered to make sure you are fully aware and fully ready for retirement. And if only 5 or less were answered yes, you’re below average and have a lot of work ahead of you. I don’t care how many you got right, having some help talking through these questions is part of what I do. It’s a very important piece of what we do. And an important piece that any financial advisor should be able to help with you with. If you want to talk one on one about your situation, go to our website: RetireEWO.com, click on “Schedule a Consult” and you can get an hour free of my time to review these questions to get you really up to speed and ready for retirement.

If you also want to take this test again or know someone that might benefit from taking the “REWO” Test, go to our website and look for the button “REWO Test” R-E-W-O Test. It’ll give you a link, and an ability to take the test, look at your scores to make sure you are ready for retirement. This retirement stage. You can win at it. You can fail at it. You can just get by. One of the best ways to WIN is to really make sure you did your homework. That you went into it after careful analysis of your options. You made the best decisions you could. The stakes are high. You’re going to look back at this time with perfect clarity on if you made the right decisions. The way you can be comfortable, is knowing you did all you could to get it right. Really take the time to get it right.

And that’s the Money Monologue.

Money Rundown:

Our Money Rundown segment is where we cover the week’s news. There are a lot of media sources out there that are going to help give you updated information about the economy and the markets. My job is to help summarize and synthesize – help pick out a few stories that are most important for you, as a retiree or investor.

Story #1 – Bloomberg published an article outlining some very interesting income tax statistics. First that the top 1% paid more income taxes than the bottom 90 percent combined. Second, the bottom 50% only paid 3% of the federal income tax received.

What does that mean for you? Well this article is very interesting. It’s not including all taxes. It’s only including federal income taxes. It’s not including social security tax, Medicare tax, real estate taxes, sales taxes. Those are taxes that have a heavier burden on the lower 50%. But when people are asking if the rich are paying their fair share, this article is very enlightening. The top 1% paying more than the bottom 90% combined. It’s kind of crazy when you think about it. The recent tax bill from Trump has made it more tax efficient for higher income earners. They lowered the highest tax rate and they’ve offered some fantastic tax deductions for business owners, possibly a 20% exclusion, and for people that own C-Corporations. So definitely a lot of opportunities in the tax world for higher income earners. Also, pay attention to what’s going on in real estate – these things called opportunity zones. There’s some new really fantastic regulations that have come up regarding real estate that can be even more attractive from an investment standpoint.

Story #2 – US Job openings topped 7 million for the first time ever. Right now there are more job openings than there are unemployed people in the US.

What does that mean for you? Well it’s just another indicator of the absolute strength of our economy. Jobs are not a forward looking indicator, they’re a backward looking indicator. But this economy is strong. 7 million jobs openings posted is absolutely incredible. If you look at the graphic, more jobs available than unemployed people – it’s just crazy and just bodes well for the economy moving forward. If you’re in the labor market, it’s a positive thing.

And that’s our Money Rundown for the week.

Best Thing I Saw This Week:

My wife, Shannon, and I got away for a little date night and went to see the movie A Star Is Born.

The movie stars Bradley Cooper and Lady Gaga. It’s a modern remake. It’s a movie that’s been re-done three other times. In 1937, ’54 and 1976 with Barbara Streisand. What a beautiful remake of this film. What a beautiful film. If you haven’t seen it, I’d recommend it! Cooper and Gaga are amazing.

Great chemistry on film. Cooper – you’ve never seen him act like this and Gaga is stellar. Definitely a sad ending to this story. Don’t worry I’m not going to spoil it. But how does it relate to you? How does it relate to retirement?

It got me thinking about how the world has changed. The internet age has put more power in the hands of the individual to shape our future. The musician is not forced to follow the traditional models. Touring just on someone else’s schedule. There are other ways. And we’ve seen some artists buck the traditional norms. Retirement is the same way. There are more choices and more power for you than ever before in shaping the life you want. Retirement is an adjustment for people. It’s tough going from having a high-profile job to suddenly nothing. There is a loss for many people. Especially if you haven’t planned enough for the transition.

The honeymoon in retirement lasts for 6 months to a year and then you’re faced with all this time. What do you do? What do you want to do? How do you find value and purpose? It’s important to understand that this world provides so many more options than any generation before you has had! So, don’t be sad. Be optimistic. Be willing to experiment and try new things and get a little out of your comfort zone. What’s sad about A Star Is Born is they didn’t see any other options – any other way out. The world of solutions that could have given them what they wanted. And the love and the joy right in front of them. For many, retirement starts as a transition period. Embrace it. Hire a personal trainer. Get in the physical shape you’ve always wanted. Throw a party. Hire a chef or a caterer and celebrate something like Mardi Gras or first day of Spring. Start writing a blog. People want to hear your insights. Write that science fiction novel you’ve been thinking about and go all in. Volunteer at a shelter for golden retrievers. Be a business consultant or coach or volunteer at SCORE helping the next generation of business and entrepreneurship. This internet age means there are no more dead ends. Only new beginnings.

You can get a gig like Uber or a dog walker. You can start the next big idea. Don’t ever feel boxed in or the best is behind you. The best is today. The best is ahead. Make the most of it.

And that’s the Best Thing I Saw This Week.

Scot Strategy Segment:

Earlier in the show, we talked about the “REWO” Test – the Retire Eyes Wide Open Test. In our Scot Strategy Segment, we’re going to talk about getting extra credit on that test and what questions didn’t make the cut. How can you be extra sure? Here are few more questions to ask? A few more that didn’t make the cut but still important to ask.

1. Do you know what accounts you will withdraw from and when? Having a withdrawal strategy is really important to optimize your tax efficiency.
   
2. Have you planned for your health insurance coverage before age 65? It’s another big one. If you haven’t, you need to. It can be very expensive unless you plan your income distributions in the right way.
   
3. Do your financial and tax advisors talk annually? This is a big one. If they’re not talking, they need to and they definitely need to in retirement as your income needs may be changing and you’re trying to decide where to pull money from and when. Some very big mistakes can be avoided if your financial and tax advisor are talking.
   
4. Do you talk to your advisors at least two times per year? Yes or no? That’s a minimum. Should be closer to three or four times to be talking to your financial and tax people. Make sure you have enough contact frequency so you can avoid some potential mistakes and make sure you’re on the right track.
   
5. Have you considered how real estate fits in your plan? A lot of people I meet with have real estate assets whether it’s investment properties…commercial properties. How does it fit into your plan? What type of income are you getting? What type of income can you expect? Are you planning on keeping it for the long term? Do you understand how the new tax bill could impact your real estate?
   
6. Have you considered side businesses in retirement? This is a big one. Maybe there’s a side business that you can do. Maybe it’s contracting, maybe it’s consulting. Those types of businesses have a number of functions. It can keep you excited. It can keep you energized about your retirement. It can give you a little extra money in retirement. It can give you some value and purpose in your retirement. But another really great thing is that it can give you some nice tax deductions and write-off for things that you might already be spending money on. And a side business can be consulting doing something in your profession, but it can be a new business. Maybe you want to start a dog walking business. Maybe you want to be a food and travel critic. A bunch of different business you could explore, including managing your own real estate that can provide you with different deductions.
   
7. Have you planned your charitable contributions? This is a big one. If you and your spouse are working, you might be in a very high tax bracket and giving to charity is saving you real money on your taxes. Once you retire, your home is paid off, you’re living off of less, you may still want to give to charity but your tax bracket is lower. Now you’re not saving as much in taxes from your charitable giving. It might make sense to pre-fund some of your charitable gifts. Look into a Donor Advised Fund. Look into your own family foundation as a way to pre-fund some of those charitable gifts, get the deduction in the years that you need them and then use those charitable gifts to fund a charity in the future.

That’s our Scot Strategy Segment for the week.

Listener Questions:

If you want your questions answered on the air, go to our website RetireEWO.com and click “Submit a Question”. We’d be happy to get your question answered during the show.

Joining us is our producer, Angela. She’s going to be reading some questions that we’ve been getting from some of our listeners. Angela, take it away!

[Angela] Thank you so much, Scot. So our first question comes from Tom in Escondido, CA.

Hi Scot. Why does interviewing advisors matter? I’ve been doing a great job managing my own portfolio. I’ve actually tripled my portfolio over the past 10 years and don’t think I could find someone to do a better job than me.

[Scot] Tom, thank you so much for the question. Congratulations. Kudos to you for managing your money so well. I think the most important thing to understand is that the next 5 years are going to look very different than the last 10 years. Anybody that’s been investing money has been making money over the past 10 years, including you. If you’ve picked stocks well, you’re accounts are probably worth a lot. You’ve done very well. I would encourage you, though, to not get complacent—not get so drunk with your own success. And to be open to the fact that, coming ahead, we may have a recession. It could drop 20, 30, 40, 50%. How will your portfolio weather that storm? The reason I encourage you to interview multiple advisors is because now, when things are good, is the time to start asking the difficult questions and time to start interviewing advisors. Once you interview three advisors, you may pick none of them. You may decide to manage your money yourself. But you’ll be better prepared if a recession comes and now you want to have professional help. You won’t be scrambling. You’ll have a plan. You’ll have an idea – okay I have these three advisors. If something happens, I’m going to go back to this guy and have him manage 25-50% of my portfolio. Better to do the planning in advance. And also better to analyze and look at their investment philosophies. How they manage investments. How they manage risks. And there’s very many people that I’ve worked where we’re not managing all of their money. Maybe we’re managing a piece. We’re managing 50%. We’re managing 25%. But we’re kind of their canary in a coal mine. We’re another indicator for them that if things start changing in this market, they have another resource that they can go to and trust to make those difficult decisions. Hope that helps, Tom.

[Angela] Question 2 comes from Tatum in Costa Mesa, CA.

How do you evaluate social security strategies? It seems pretty simple to me. Take as much money as you can as quick as you can before the federal government runs out of money.

[Scot] Tatum, it’s way more complicated than that! It really is. In fact, one of the biggest mistakes people make is they just turn on their social security at 62 even though they’re still working. What they don’t realize is they’re going to get penalized and not receive very much of those benefits and not get the same pay raises they would have received by waiting. Everybody’s situation is different and there are strategies such as a restricted application, spousal benefits, how these benefits are taxed that you really need to understand in order to tax optimize your overall picture. It’s not as simple as just taking it as early as possible because there are other factors to consider like your taxes, your assets, where your other income is going to come from, etc. And social security benefits are taxed very differently to make sure you understand that when you’re analyzing different social security strategies. One of the biggest things to keep in mind is if you’re married, remember the lower benefit amount goes away. The smaller amount goes away if something happens to you or your spouse. Now if you’re both 95 years old, you’re not going to miss that other social security amount, but if you’re in your early 70’s and heaven forbid something happens to one of you and you miss out on that lower social security amount it can really impact your overall plan and you would have been a lot happier if one of you would have been deferring your benefits a little longer to have that bigger pile of money.

[Angela] And our final question is Beth in Corona CA.

I have a home worth $700k and a mortgage of $350k. I’m 65 and feel like I can’t retire until it’s paid for. Should I withdraw my 401k to pay it off or downsize instead? What are my options?

[Scot] Well, Beth, thanks so much for writing in about this question. Definitely, you don’t want to pull from your 401k to pay it off. At least not all in one year. For you to pay down a mortgage of $350,000, you’d likely have to pull your entire 401k or $700,000 to pay the tax. Because of the way our tax laws work, the more income you make, the higher tax bracket you’re in. If you want to net $350,000 to pay off your mortgage, you’re going to have to pull out almost $700,000. It just doesn’t make sense. Now if you want to pay a little bit off over time, say you pull $35,000 over the next 10 years, a little bit better strategy, a little bit more manageable, and probably a little bit better tax bracket. I understand your desire to pay down your mortgage. It’s a very common thing. So you have some other options. Some of your other options would include pulling from your investments to pay down the mortgage quicker. That’s an option. Another option would be downsizing to a lower cost community. Especially in Southern California, if you can afford to live more inland or live further from some of the employment centers, you can save some money on housing. Consider over 55 communities where the price of housing can be over 50% less than regular communities. Those would be your options to reduce the cost of your housing.

That’s the end of our listener questions for the week. Angela, thanks so much for joining us. If you want your questions answered during the show, go to our website retireEWO.com and click on the button “Ask a Question”. You can also follow us on Facebook or subscribe to our podcast on iTunes. I want to thank all of you so much for listening. Stay tuned next week as I continue to help you learn how to retire with your eyes with open. Don’t go into retirement with your eyes closed, retire with your eyes wide open. I’m Scot Landborg and we’ll see you next week.