How to Spend When You First Retire

Key Points – How to Spend When You First Retire

It’s Time for Your Money to Go to Work for You
Understanding the Three Tax Buckets
Where Are You Going to Be Spending from?
How Are You Going to Claim Social Security?
12 Minutes to Read | 21 Minutes to Watch

How to Spend and Where to Spend from When You First Retire

Thinking about retirement can be exciting. However, it can also be overwhelming. Our Modern Wealth Management team is here to help you so that retirement doesn’t feel overwhelming. One of the aspects of retirement that can feel overwhelming is the first year of retirement and what to expect. Dean Barber and Bud Kasper are going to discuss how to spend when you first retire on America’s Wealth Management Show so that you can have more confidence, freedom, and time—not only in your first year of retirement, but throughout retirement.

What Are the Steps You Need to Take to Retire Successfully?

Dean and Bud are going to help us explore the essential steps to take before you retire so that you can confidently manage your finances when you step into this exciting phase of life. We’re going cover topics such as how to access your retirement funds, figure out the best accounts to spend from and when, how much you can spend, and so much more.

Our goal is to provide you with insight and practical tips to help you make informed decisions about how to spend when you first retire and throughout your retirement. From budgeting effectively to maximizing your retirement savings, we’ll strive to guide you toward a financially secure and fulfilling retirement.

Where Is Your Money Going to Come from?

As you’re figuring out how to spend when you first retire, you need to know where your money is going to come from. That’s something that really becomes top of mind when you’re approaching retirement.

When you’re working, knowing where your money is going to come from is simple. You know what day of the month your money is going to be deposited into your checking account. You know how much it’s going to be and how much has already been withheld to go into your 401(k) plan. And your taxes have already come out of your paycheck, so it’s easy to get on autopilot. But that all changes when you go into retirement.

“While it’s an exciting phase of life, it can also be a bit overwhelming because you’ve worked your entire life to save the money that got you to this point. Now, it’s time for that money to go to work for you.” – Dean Barber

The Three Tax Buckets

So, should you spend from your account that has already been taxed? Should you spend from your account that will never be taxed? Or should you spend from your account that is tax-deferred? Which account should you spend from first?

The taxable bucket consists of your savings and brokerage accounts and taxable money. The tax-deferred bucket includes your traditional IRA or 401(k) and pensions. It’s taxable when accessed. And then you have your tax-free bucket that is typically a Roth account, where the taxes are paid upfront but you get tax-free growth and distributions. Those of you that know Bud will know that his favorite one of those three buckets is the Roth.

“You can take certain income at certain levels of the tax bracket and have a low tax consequence. But then we can go over to the bucket that has tax-free income blended into the two and get a really nice return that is not so tax onerous that it causes less future income.” – Bud Kasper

The Fear of Running Out of Money

You need to think about how much you need and how much you have permission to spend. When people go into retirement, a lot of times they If people haven’t done the proper planning before they retire, they won’t have clarity on how much can they safely spend without the fear of running of money. The number one fear that people face in retirement is running out of money.

Building a Comprehensive Financial Plan to Determine How to Spend When You First Retire and Beyond

It can creep into people’s minds that if you screw something up on how to spend when you first retire, you could be going back to work. It’s an understandable fear to have. Honestly, it’s healthy to have some skepticism associated with it. But how do you relieve that skepticism? The only way you relieve it is by building a comprehensive financial plan that focuses on that income that you’re going to need for the rest of your life.

When you complete your financial plan with one of our CFP® Professionals you’ll find out your probability of success. So, what in the world is your probability of success and how do you figure it out, you might ask? It’s a good question. It means that from a historical perspective, you can do everything you want to do X% of the time, and never need to adjust your spending will tell you what percentage of likelihood you would have in being able to generate that income for the rest of your life.

You Can’t Take a Set-It-and-Forget-It Approach with Your Financial Plan

Here’s the thing, though. Your financial plan isn’t static. There are always adjustments that need to be made. Your goals will change. Tax brackets will change (if you didn’t know, the Tax Cuts and Jobs Act is sunsetting on January 1, 2026, which means tax rates are going back up to the rates from 2017). As your life changes, you need to review and update your plan as necessary via stress testing to make sure that you’ll still be OK.

“We need to account for those changes when we’re doing income planning for clients for retirement. It’s not a simple deal. It’s complex, but it’s doable. And again, what are we trying to achieve? The best net return for you to live off as a retiree?” – Bud Kasper

A Story About the Importance of How to Spend When You First Retire

Let’s hear a story from about an experience he recently had with one of his long-time client couples to better understand the importance of how to spend when you first retire. The wife is just a few days away from retirement. She could’ve retired a long time ago, but wanted to keep working until her boss recently made her very upset. The husband is a small business owner. They’ve also been very successful in doing some real estate investing and have done a great job of saving.

So, it was time for Dean to review their plan. The wife wanted to make sure that she could replace the net amount that she had been getting every two weeks into her checking account so that she could keep living the same lifestyle that she’d been living outside of work. They had planned for that, so that wasn’t a problem. However, she was wanting to set up withdrawals to come out of her IRA. Dean had other ideas of how she should spend when she first retired, though.

“I said, ‘No, no, no, no, no.’ She asked me why not, and I pointed out that she had other income that she wasn’t spending now that’s being generated from their real estate investments. They needed to spend that money. She wasn’t sure about that since her husband ran all the real estate, but the properties they had were generating income that they weren’t spending. They were piling it into savings. It didn’t make sense to take that money that’s already taxable and pile into savings and at the same time pull money out of your IRA to satisfy your need.” – Dean Barber

Seeing Why It Matters How to Spend from When You First Retire

She was still wondering why she couldn’t do the IRA withdrawals, but Dean gave her 30,000 reasons why. To get the net amount into her bank account to do this and have the same lifestyle that she’s had was going to cost an additional $30,000 a year in taxes if she pulls that out of the IRA.

“I said that I would rather that she spend the money that’s coming in from their real estate investments. If she wanted to get some money into a tax-free spot, let’s convert up to that $30,000 tax bill to get her into a tax-free scenario. So, we sat down with our in-house CPA, who suggested that they convert about $150,000 a year, taking them all the way to the top of the 24% bracket for the next two-and-a-half years until the tax rates go up in 2026. So, it was a very aha moment for her and her husband because he was the one who didn’t want to spend out of the real estate account.” – Dean Barber

If they hadn’t had a well thought out plan that they’d been working on for years, they would’ve been overpaying their taxes by $30,000. It wouldn’t have been because they did their tax return wrong. It would’ve been because they didn’t think about their spending strategy and how to spend when you first retire.

And a Story from Bud About How to Spend When You First Retire

Dean’s story of his client couple made Bud think of a recent meeting with one of his clients. This client has a lot of income possibilities connected with her investments. However, there were two red flags that Bud noticed about her situation.

The first thing that she had done was borrow out of an insurance policy. That can be paid off or be left alone. If it’s got cash build up, she can let it make the premium payments because she’s making premium payments. Bud encouraged her to pay it off.

“If possible before you retire, eliminate debt. She had that to contend with. Then, she had a home loan on top of it. We looked at that and she and these are two things that are hanging over her head that won’t work for her from that perspective. We developed a plan so we could start erasing some of that debt and she was thrilled with the results.” – Bud Kasper

Determining How to Claim Social Security

The other thing you need to think about with how to spend when you first retire is Social Security. A lot of people think that your retirement date is synonymous with the date that you claim your Social Security. Don’t fall into that trap. It’s not the best strategy.

“You need to understand that Social Security has many different options on how and when you claim. The difference between the best and worst strategy can oftentimes result in another $100,000 of additional income through the same life expectancy.” – Dean Barber

Then, you need to have the overlay involved with Social Security. If you start taking Social Security, can it be taxed? The answer is yes. There’s a high probability based upon your other income sources that it will be taxed. Can you avoid that? That answer is also yes if the right income stream is created. That’s why it’s critical for a CPA to work alongside your CFP® Professional to get the net result that is going to be last for the entirety of your retirement.

Reviewing Some Crucial Questions About How to Spend When You First Retire

So, do you understand how and when you should claim your Social Security, how and if your Social Security is going to be taxed, and then which account you withdraw from? Those are some important questions when it comes to how to spend when you first retire. Then, you need to ask yourself if you can do automatic withholding on withdrawals from your IRA?

“That’s what we suggest. We have one of our CPAs run the tax analysis to project what you’re going to owe based on what you’re going to spend from which account. So, we’ll do automatic withholding, both state and federal if you live in a state that’s taxable. When you get to the end of the year and it’s time to file your tax return, you’ll get your 1099-R. It will indicate how much you would draw from your taxable account, how much was sent to the Feds, and how much was sent to the state. It makes it very simple to file your tax return.” – Dean Barber

Otherwise, you must estimate and make quarterly-estimated payments. Most people prefer that it’s automatically withheld from their monthly income just like was when they were working. A lot of people don’t think through the process of how their income sources are going to be treated from a tax position. Therefore, we need to identify all those as well.

4 Things to Expect in Your First Year of Retirement

Before we wrap up this article, we’d be remiss if we didn’t mention a recent Modern Wealth Management Educational Series webinar that featured Dean and Ken Osiwala. It fits right into this discussion about how to spend when you first retire because Dean and Ken reviewed four things you can expect in your first year of retirement. Let’s review those four things.

Retirement Won’t Feel Like a Vacation, but Every Day Is a Saturday
It’s Going to Be Emotional, Both Good and Bad
Your Spending May Be Surprising without a Budget, But Shouldn’t Live Like You’re Broke
You’ll Be Anxious with a Plan; With a Plan, You’ll Have Confidence, Freedom, and Time

Two Resources That Can Help You Dictate How to Spend When You First Retire

They honestly saved their best point for last because a financial plan is imperative. If you think you have a plan, Dean and Bud have a challenge for you to see if it has all the components of a financial plan. Set aside some time to download and thoroughly review our Retirement Plan Checklist and Tax Reduction Strategies guide. And make sure your significant other does the same thing.

Our Retirement Plan Checklist is comprised of age-based and date-based timelines of things to consider as you approach and go through retirement. It also includes 30 yes-or-no questions that gauges your retirement readiness. Download your copy below to see how your plan holds up.

Retirement Plan Checklist

And as we were saying earlier, it’s so important for a CFP® Professional to be working side by side with a CPA so that a financial plan can be reviewed from a tax planning perspective. We’ve already discussed one tax planning strategy in that of Roth conversions. You can learn more about how to pay as little tax as possible over your lifetime by downloading the Tax Reduction Strategies guide.

Tax Reduction Strategies

Back to the Future

To build a great financial plan, you need to take a trip into the future. Once again, this is something that should be done with your significant other and your financial advisor. You need to take a trip into the future to determine what you want your life to look like. Once you do that, then reverse engineer all the way back to today. That’s the very foundation of creating a good plan.

“One of the most fun things that we do as financial planners is take this trip into the future with our prospective clients. Then, we continue to take that trip into the future with our existing clients as we review and monitor your plan. We do that through something called a prioritization exercise. This prioritization exercise is a way for each spouse to outline things that are most important to them and what they want their future to look like.” – Dean Barber

What Are Your Significant Other’s Needs, Wants, and Wishes?

During the prioritization exercise, both spouses are in the same room with one of our advisors, but we’ll first have conversations with each spouse separately. Only one spouse can talk at a time so that the other spouse can clearly understand their partner’s needs, wants, and wishes.

“So many times during those conversations, one spouse will finish and the other spouse will look at them say that they didn’t realize that something was that important to them. That’s that trip into the future. That trip into the future serves a foundation for a good CFP® Professional to create the plan and bring clarity to where you’re to get the money to do the things that you want to do. Which account should you withdraw from? Getting to the foundation of the why is the most rewarding part of what we do. And then we watch their lives unfold as they go to that time of retirement or financial independence. That’s when they begin to do all the things that they want to do.” – Dean Barber

The Validation of a Forward-Looking Financial Plan

Usually, the nervous part of that experience is the first year. You’ve accumulated all these different assets but are questioning if your money is going to adequately work for you. People who don’t have financial plans will be more prone to cut back on how much they spend when the first retire because they don’t have the clarity. That’s why it’s so critical to build a financial plan at least five to 10 years before you retire.

“I get that apprehensive feeling. I really do. That apprehensive feeling comes from lack of clarity. It comes from fear of the unknown. The only way you can get that validation is with a good, solid plan. A financial plan is not your investments. Your investments are a part of your overall financial plan. Your investments an important, but small piece of your plan.” – Dean Barber

Do You Have a Forward-Looking Financial Plan?

Hopefully Dean and Bud have helped illustrate how crucial it is to have a financial plan so that you know how to spend when you first retire. If you don’t have a plan, we want to help you change that.

You can get a true sense of all the components of a complete plan by building your plan with the financial planning tool that our CFP® Professionals use with our clients. Yes, you read that right. You can use our industry-leading tool at no cost or obligation from the comfort of your own home. So, what are you waiting for? You can begin building your plan today by clicking the “Start Planning” button below.

START PLANNING

It’s natural to have a lot of questions about how to spend when you first retire. We don’t want to let your questions go unanswered or for you to feel overwhelmed for what should be an exciting stage of your life. By clicking here, you can schedule a meeting with one of our CFP® Professionals to ask us your questions. You can schedule a 20-minute “ask anything” session or complimentary consultation. That meeting can be in person, virtually, or by phone depending on what works best for you. We hope to hear from you soon to discuss how you can spend for when you first retire.

How to Spend When You First Retire | Watch Guide

00:00 – Introduction: Shoutout to Jack Kasper
01:53 – Let’s Talk About Spending
03:12 – Which Account Do I Spend From First?
09:48 – Retirement Spending Red Flags
10:56 – Think About Social Security
12:15 – Let’s Talk About Taxes
15:59 – Back to the Future
21:11 – What We Learned Today

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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.