Top 5 Money Mistakes to Avoid in Retirement

Top 5 Money Mistakes to Avoid in Retirement

Links Mentioned in this Episode

• Podcast Episode 1: IRAs vs Roth IRAs Pt. 1
• Podcast Episode 2: IRAs vs Roth IRAs Pt. 2
• Podcast Episode 8: Estate Planning: Wills and Probate
• Podcast Episode 18: What Retirees Need to Know About Roth Conversions
• Podcast Episode 34: How to Maximize Your Social Security Benefits

Complimentary Consultation

Dean Barber: Thanks so much for joining us on America’s Wealth Management Show. I’m your host Dean Barber, along with Bud Kasper. Okay, Bud. It’s a spooky day out there today.

Bud Kasper: And isn’t it fun when the shows fall on a holiday, and we can tease around that a little bit? 

Dean Barber: Absolutely. Let’s have some fun with this. So, when you think about the spooky things out there today pertaining to your money, our economy, and the markets, what do you think is the scariest right now?

Bud Kasper: It’s funny. I was thinking about that because I saw something the other day. It scared the dickens out of me. It was Nancy Pelosi. And I said, “Well, look at that. Oh, it wasn’t a mask.” And it still scared me. Look out, folks.

Dean Barber: So, you’re saying Nancy Pelosi is the scariest thing out there.

Bud Kasper: Without a doubt.

Dean Barber: Oh, okay. Well, I was thinking something more along the lines of all the ghouls and goblins that are out there on Halloween night. Some scary things, some supernatural stuff is going on out there. I think the nation is split about as close as we’ve ever been. 

Bud Kasper: No doubt.

Dean Barber: We’re split into those who are fearful of a second Trump administration and those who are fearful of a Biden administration. And that is paralyzing a lot of people. 

Bud Kasper: Sure, it is. 

Dean Barber: Right?

Bud Kasper: Mm-hmm (affirmative).

Dean Barber: And it’s inciting a lot of emotion. Okay? You and I both know, Bud, that emotion must be removed from the equation when investing. We must invest based on logic and a sound strategy that matches what our overall objectives are. Yet, we repeatedly see the masses primarily drive that investing by two emotions. And that’s fear and greed. And right now, I think that we see some fear drift back into the marketplace. 

We did a video here a couple of months ago. With the presidential election coming up, we talked about with COVID-19 out there, that we expected volatility to return to the market. And of course, volatility has returned. We haven’t seen anything that is a devastating situation like what we saw earlier in the year. Still, that concern, and that emotion that’s riding around the market today, is scary to some investors.

Bud Kasper: I agree. I think we never like the unknown. And you think you don’t like it? The market hates it. So, having to deal with these issues is most certainly front and center at this particular time. You made the point, another four years of Donald Trump, that might be scary to some people. It might be joyful for others. Here we bring Biden in. But of course, he attaches himself to the record that he had if that’s fair to say, with President Obama. As a senator, we don’t know about Kamala Harris and whether she will assimilate into a vice-presidential role. And of course, you hear all the scary stories. 

Dean Barber: I can’t tell you the number of calls that I’ve had that have been on either side of the aisle. “Well, what happens if Trump gets reelected?” and “What happens if Biden gets elected?” 

I want to take a step back from the election. Because while it’s scary, it is a highly emotional issue for everybody listening, right? On both sides of the aisle, it’s highly emotional. It’s some of the craziest things I’ve ever seen in my life. I think you might concur with this, Bud, that just the unrest and the meanness that is coming out. I’m asking myself, “Why? When did we stop becoming Americans first and then either a Democrat or Republican second?”

Bud Kasper: Yeah. 

Dean Barber: Let’s take a step back from that for just a minute because the reality of our capitalist society is pretty simple. And that is that the consumer, those listening right now and the people that you know. Me. You, Bud. Our families. Everybody we know. We are the 800-pound gorilla in the corner. Because consumer spending, what the consumer does, equates to 70% of our total gross domestic product. 

In English, 70% of every dollar spent in the United States on an annual basis is what you and I do. As powerful as they want to think they are, the government doesn’t have as much influence on the economy as they want you to believe. They drive what equates to 15% of our GDP. Then corporate spending is another 15% of our GDP. 

I would say that the scariest thing out there today is COVID-19. The psychology of COVID-19 has paralyzed this country and the globe with fear of dying of this virus. And so, people aren’t out spending and doing. That’s the biggest threat to our economy moving forward. It’s not Joe Biden and it’s not Donald Trump. It’s COVID-19. We need effective treatment, or we need a vaccine.

Bud Kasper: No doubt about it. I heard somebody say the other day, “The experiment of democracy is at risk here,” in terms of how we can proceed, regardless of who becomes president. 

Dean Barber: Right. The critical thing here is to understand the real risks and then control what you can control. Our Guided Retirement System™ is specifically built to allow you to have clarity, confidence, and control through all economic and socioeconomic conditions. I’d love for you to call us and get a complimentary consultation. Let’s talk to you about what’s going on. What are your expectations? What are you trying to do? And then, we can outline for you how we can help.

It’s Halloween, and there are some dangerous things out there in our world. We talk about what’s the scariest thing out there, and I think to answer that question, it’s going to depend on the time of your life that you’re facing.

Alright, so let’s imagine for a minute that you’re in your early to mid-60s. Mom and Dad are in their 80s, pushing 90. They’ve got a fair amount of money, but they are stubborn. They’ve not done an estate plan. They have no Will. They have no Trust. And they’re like, “You can just figure it out.” Now, to me, I’m going to say the Grim Reaper is the scary one there. Right?

Bud Kasper: Yes.

Dean Barber: Because I have witnessed adult children trying to clean up the mess of an estate that was left behind, and it’s not a one or a two or a three-month project. It’s a one or a two or three-year project. Right?

Bud Kasper: It can be.

Dean Barber: It Can be, so some people might say that the scariest thing out there is none other than the attorney. Right?

Bud Kasper: Boo, I just got a shiver down my spine.

Dean Barber: But in this case, a good estate planning attorney working alongside your CERTIFIED FINANCIAL PLANNER™, which is what we have here at Modern Wealth Management, can be your friend, and they can help the fear of that Grim Reaper go away. 

When you’ve got it all buckled down, when you’ve got that estate plan that’s coordinated with your overall financial plan, there is a sense of calm. There is a sense of confidence. The children know that they will be able to grieve the loss of a parent and worry about those things in life that are important no the estate’s settlement details. So, I would say that one of the top five mistakes that’s made, people retiring is not having a proper estate plan in place when you pass that estate to the next generation.

Bud Kasper: You know, or many people don’t know, the amount of work it takes to settle an estate. I’ve been doing this for 38 years; many times, people are suddenly assigned as the executor of an estate, and they’re surprised. Now they’re coming to me and saying, “I don’t know what to do. I don’t want to screw this up,” and all this stuff.

I understand it, and that’s why we encourage our clients to have family meetings.

Dean Barber: Absolutely. You need to do that.

Bud Kasper: Yeah, but you know there’s a lot of people that, I’m talking about the parents now, that don’t want to share necessarily all their financial wherewithal with their clients. I think that’s a huge mistake, but people do that.

Dean Barber: Right, but at the same time, you can have that family meeting without exposing everything that you have. You can say, “here’s the construct of what we’re doing. Here’s why we’re doing what we’re doing. Here is the process that’s going to ensure when we’re no longer here. Here are the professionals that are going to make sure that everything’s done. They know everything, and they’ll help.”

That’s the purpose of the family meeting. It’s not necessarily to say, “this is how much property Mom and Dad have. This is how much assets they have. That is how much life insurance they have. And this is how much they’re going to give to charity.” That’s not the point. The point is to ensure that they have that clarity about what will happen when the inevitable time comes to meet our maker. 

Bud Kasper: Technology can be your best friend in these situations. We have scattered families. One son lives in one city; one daughter lives somewhere else. But when we bring the family together for these meetings just to explain the process, and people say, “Oh, I don’t want to talk about Mom passing away.” Hey, you’ve got to step up to the plate and do the right thing, because otherwise, it’s going to be very scary.

Dean Barber: I did a podcast on The Guided Retirement Show that is all about estate planning, wills, and probate. It features Garrett Griffin and Jason Salinardi, both estate planning attorneys. That is podcast number eight on The Guided Retirement Show. You can find the episode on your favorite podcast app. You can also find it on YouTube. Look for episode number eight, Estate Planning: Wills and Probate. We explain what it’s all about and why it’s critical in really, really simple terms, not going to speak over your head.

We were doing this show on Halloween because I’m kind of a glass-half-full type of a guy. I’m always looking for opportunities in front of us, but I’m also a realist. I know there is danger ever-present as you near retirement and as you enter into retirement, and there are several different things that can derail your retirement plans. 

One of the top five mistakes we’re covering today is not having a will or trust. It is a huge one. It is one that I think is scary, and I see it happening, and I know you do too, pretty much daily. People, as they come out of college, they work, they start to save. Now they’re following a budget. They know how much is coming in. They know there are things to take care of, so they’re very conscious of what they spend.

As they age, after raising their children, and when the children are out of college, all of a sudden, they got this financial freedom that they haven’t had. They’ve got more disposable income coming in than what they’re spending, and so the idea of a budget is tossed out the window. We know we’re not spending everything we’re making, so what does it matter? We don’t need to follow that tight budget anymore.

But I think one of the biggest mistakes that people make heading into retirement is not identifying what is that budget because, without that budget, you can’t say, “What does my money need to do for me to do everything I want to do?” 

Bud Kasper: Right. Well, you kind of became un-scary then, because your youngest child is now out of college.

Dean Barber: Yeah.

Bud Kasper: Yeah, and so you’re free from that. But for me, on the other hand- 

Dean Barber: My clients keep telling me, “They’re coming back. They’re coming back.”

Bud Kasper: Now, that is scary.

Dean Barber: That is scary 

Bud Kasper: I’m sorry. I leased out your room, and you’re going to have to-

Dean Barber: They’re coming back. No.

Bud Kasper: Yeah, but if you take in my case, and this just happened this past week because my son’s a senior in high school. We applied at six different universities over the weekend. So, I’ve got four more years to deal with that. My daughter after that, so I’ve got a scary little time here. I’m hoping that I have done the right things from a savings perspective to handle that, which I have.

Dean Barber: You know you have.

Bud Kasper: Yeah, but in the same regard, those who haven’t are what? Very scared. 

Dean Barber: They are. Well, let’s face it. There are all kinds of things that are uncertain about our future. The future itself is uncertain. And we can sit here today and talk about the presidential election, about COVID-19, and the future of taxes and inflation. We could talk about the deterioration of the morals of our society. I mean, there’s all kinds of things that we do.

But look, when you’re talking about your money and your life, everything that happens is up to you. You have to assume personal responsibility for your financial security. The problem with that is that you need to do so vastly; unless you’re willing to invest the time and energy to educate yourself on everything you need to know, you’re going to wind up making mistakes.

That’s why we’re here. That’s why we have a job, and I would love to invite you to get ahold of us, and let’s start a conversation through a complimentary consultation. Let’s understand what it is that you’re trying to accomplish. What are your fears, your hopes, and your dreams? Let’s put together a plan for you. Let’s start with a complimentary consultation where we’ll sit down, introduce ourselves, get to know you, and see where we go from there. There’s no cost or obligation. We can do it via a Zoom meeting, telephone, or in person. 

Hey Bud.

Bud Kasper: Yes? 

Dean Barber: Werewolves are going to be out tonight since it’s Halloween. Do you remember that movie, American Werewolf in London? Did you see that way back in the day?

Bud Kasper: Oh, sure.

Dean Barber: What they did in that movie with the technology at that time-

Bud Kasper: Yeah, turned into the wolf.

Dean Barber: It was unbelievable, right?

Bud Kasper: It was!

Dean Barber: What it reminds me of is our Social Security system. Because it has been morphing into the werewolf, and it’s taken a long time to do it. We talked about this last week in detail. The Congressional Budget Office right now is saying that by 2031, we’re talking ten years from now. Unless we do something to secure the system, all Social Security recipients will receive only 80% of their checks. So that is a slow morphing of something terrifying to many people.

If you missed last week’s show on the future of Social Security, you can find it here.

We also did a podcast from The Guided Retirement Show, where I interviewed a former employee of the Social Security Administration and a CPA. They have teamed up together to help educate financial advisors on helping their clients get the most out of Social Security. That is episode 34 of The Guided Retirement Show.

We know this is a hot topic because we know that Social Security is at the foundation of most people’s retirement. For some of you, it’s a bonus. It’s extra money that maybe you don’t need that you’re going to be able to do some things with. But for the vast majority of you, it is the foundation.

If you have to take a 20% cut in your Social Security check, what’s that going to do? So let’s address this werewolf that is morphing, Bud.

Bud Kasper: It’s a big deal. It is a big deal. There’s a double scare there if I could say that, which would be the taxation on Social Security. Because many people enter in on that benefit and think, “Well, yeah, it came out of my paycheck. There’s certainly can’t be more taxes due on that.” Sorry.

Dean Barber: There is.

Bud Kasper: Yeah. It depends on something called provisional income, which is a calculation to find out just how much, if any, of your Social Security is taxed. But if you don’t know that, you’re going to have a little surprise. It’s going to be scary.

Dean Barber: Okay. So here’s the thing with Social Security. First of all, the money in the Social Security system or the IOUs, however, you want to think about it, the money that’s there is your money. It came out of your paycheck. Your employer was forced to make a dollar for dollar match and send it off to the government to go into the Social Security system.

Think about this. If you were putting money into your 401(k) and your employer was matching dollar for dollar everything you put in, first of all, you’re going to amass a pretty nice chunk of money by the time you retire. Do you think you might want to pay attention to what that money is doing, how it’s invested, what you’re going to do to get that money out? 

Do you think you might want to know a little bit about what’s going on with perhaps the largest asset you have? Of course, you do. Yet so many think, because of our damn politicians – sorry, about my language there, but that’s the way I feel right now. So many people think that Social Security is an entitlement system, and it’s not an entitlement system. It is your money.

Bud Kasper: Well, of course, people will say, “Well, it’s out of my control. I can’t do anything with the money that’s in the Social Security system.” Well-

Dean Barber: Wrong again.

Bud Kasper: Yeah, you can. That’s called voting.

Dean Barber: It’s Social Security maximization strategies, Bud, which you and I started talking about back in 2008. What most people don’t realize is that regardless of whether there’s going to be a 20% reduction in Social Security in the future or not, you’re going to get the reduction on either the higher amount that you’re eligible for or, the lower amount that you’re eligible for.

What I mean by that is the average couple at 62 years old will have over 600 different ways that they can claim their Social Security. The difference between the best and worst claiming strategy is often over $100,000 of additional lifetime income. So if it gets cut by 20%, okay, maybe now it’s only $80,000 of additional lifetime income, but that’s significant. Everybody that will be claiming security in the future should be looking at these options. You should understand how they fit into your overall retirement plan.

Bud Kasper: That’s so true. From the planning perspective and staying on our theme of scary things for Halloween, I think the other issue that comes into play so often in the planning perspective is, “When should I take my Social Security and the amount that I’ve received at that time?”

One other thing that’s even scarier from that perspective is healthcare. Because people trying to retire before age 65 will have significant challenges in terms of how they will pay for their healthcare.

Dean Barber: I’ve seen multiple situations where people have had to delay. They had enough money to retire, but pre-Medicare, they continue to work because of healthcare costs. That’s a sacrifice that, in some cases, isn’t necessary, but in other cases, it is! 

If you look at healthcare for somebody that is not going to get a retirement benefit, that their company will pay for the healthcare for the rest of their lives, and that’s pretty much gone. You know what? You’re going to be for a married couple in your early 60s. You’re going to be looking somewhere between $25,000 and $35,000 a year, just for the premiums on your healthcare. That is outrageous. So yes, I get it.

Bud Kasper: Which tells you what? You better have other resources that you’ve been saving in to supplement what Social Security has become, which is simply a baseline amount of money to support your income.

Dean Barber: You know what that is, Bud. If you don’t know what Social Security is going to bring in, you don’t know what your Medicare costs are going to be, you don’t know what your healthcare costs are going to be, and you’re not inflating those healthcare costs at a different rate than you’re inflating other everyday things that you do for your standard of living, that is going to blow your budget.

Bud Kasper: It will, and that creates a very scary experience. You don’t want to be dependent on the government for your retirement. I mean, granted, you paid into it. You should get your fair share out and maximize the result if you can. But by golly, if you haven’t been doing the right things, it’s going to be a very scary retirement for you.

Dean Barber: No need for that to happen. That’s why we created The Guided Retirement System™ to guide you through all of the challenges and scary things out there. We want to bring clarity to your life to have confidence and control throughout your retirement, living your one best financial life. That’s what we do, and that’s our mission.

We’d love to talk to you; to sit down, give you a complimentary consultation, whether through a Zoom meeting, telephone call, or an in-person meeting. Reach out to us for that complimentary consultation here. Let’s make sure that all those spooky things out there that could derail your retirement don’t derail yours. 

Do you know what a scarier day is than Halloween?

Bud Kasper: What?

Dean Barber: Tax day.

Bud Kasper: Can be!

Dean Barber: Well, we’ve done a lot of shows, though.

Bud Kasper: Yeah, we have. Yeah, what, 15 years’ worth?

Dean Barber: Yeah, the longest-running financial education program in Kansas City, for sure.

Bud Kasper: Yeah, so what’s the next scary thing we’re going to tackle?

Dean Barber: Well, I told you the scariest day of the year for me is April 15th. That’s the day you need to file your tax return.

Bud Kasper: Right, I second that.

Dean Barber: You know, the thing is, we’ve talked about this so many times, and we always say, “Look, there are certain things that are beyond our control when it comes to the things that go on in the economy, things that go on in the market.” 

Some things are beyond our control, and a lot of times, it’s interesting because people will want to spend the time trying to figure out the things that they have no control over. Yet, if you would spend your time focusing on the things you can control, the results can be unbelievably great. In fact, it could shine a bright, bright light on something that you thought was scary. What I’m talking about here is taxes.

Number five on our list of top five money mistakes to avoid in retirement is paying too little in income taxes. Now, that might sound counterintuitive. What do you mean? Paying too little?

Well, here’s what happens. It’s the short-sightedness of people who don’t understand that as long as we live in the United States, and as long as we have money or make money, that taxes will be a fact of our life. They may be a fact of our life even after we pass if we don’t have our estate plan adequately done, which we addressed earlier.

So paying too little: What am I talking about? When you get into retirement, most of you who have done an excellent job saving for retirement have saved money in different tax buckets. 

We call that tax allocation. You have some money in an account that’s already been taxed. You’ve got your IRA or 401(k) money that’s tax-deferred. When you pull it out of that, it’s going to be taxable. And then you’ve got your Roth IRA money that’s going to come out tax-free. Many of you are sick of paying taxes throughout your life, get to retirement, and have this after-tax money. You’re going to think, “You know what? I’m going to stick it to Uncle Sam here for a few years.”

So, you start taking money out of the account that’s already taxed. Since you’re spending the money that’s already been taxed, you’re not taxed on it again, but it’s coming into your checking account. You’re able to spend it and live your lifestyle, and you wind up with this big fat, “I have zero taxable income this year. So guess how much I’m sending off Uncle Sam: zero.” Well, that can be a huge mistake.

I say that because is if you have money in an IRA or 401(k), what you should be doing is fast-forwarding your life to when those required minimum distributions (RMDs) start. RMDs begin at age 72 now. What will happen when you’re forced to start taking money out of those IRAs? What tax bracket will you be in then, based on current tax law? Chances are it’s going to be higher than a 10% or 12% bracket.  

The reason I say 10% or 12% is because when you’re in that low tax bracket, and you’ve got that money that you’re spending that’s already been taxed, you should be thinking about getting money out of those IRAs at a lower tax bracket. Because you know if you delay it too long, it’s going to be at a higher tax bracket when you’re forced to do the required minimum distributions.

Well, what should you do with that money? You have two choices. 

A. You could take it and put it into a bucket that’s taxable again, and you can continue to spend off that. 

B. My favorite is you convert it over to a Roth IRA so that all future earnings on that and all future distributions on that are, guess what? Tax-free. That is the Holy Grail. 

Now, you need to understand this, and we can’t explain it here on America’s Wealth Management Show because we don’t have the time to get into the detail, but we do have the time to get into the detail on The Guided Retirement Show. I have three episodes that I want you to listen to when it comes to Roth IRAs versus traditional IRAs. You’ll find links to those episodes below. 

  Podcast: IRAs vs Roth IRAs Pt. 1   Podcast: IRAs vs Roth IRAs Pt. 2   Podcast: What Retirees Should Know About Roth Conversions

I suggest that you do them in order: Episode one, episode two, and episode 18 of The Guided Retirement Show. I dive into detail with our in-house CERTIFIED FINANCIAL PLANNER™ and CPA, JoAnn Huber, about what retirees need to know about Roth conversions.

If you do things right, you can reduce the amount of money you’re paying over your lifetime, but it takes some proactive, forward-looking planning. You can’t just look at a tax man like that scary person that’s out there, and they’re coming to take your money.

Bud Kasper: You were talking before about how you take money to mitigate taxes as much as possible. The vision that came up to my mind, Dean, was three funnels. One funnel has taxable money, meaning you’ve already paid the tax in that bucket, in that funnel, if you will. The other one’s going to be tax-deferred. That would be your IRA. And of course, your tax-free, which could be municipal bonds, Roth IRAs, and everything. 

I envision reaching up and pulling on a string that lets only so much out of the taxable bucket and so much out of the tax-free bucket. We’re trying to blend this combination of assets. This way, we understand we’re only going to get to the next highest tax bracket threshold. We are, therefore, doing what? Controlling the taxes to the best of our ability by exercising our options that are out there.

Dean Barber: Now, you’ve got a fourth bucket there, Bud, and we talked about that fourth bucket in the last segment. That fourth bucket is your Social Security. You could have a fifth too, which is your pension. And the spigots that you can turn on and off on a Social Security are more limited on a pension, right? Once you turn them on, you can’t turn them back off. So the question is: When do I turn those on? How do you blend all those different sources of income?

Well, you know what we call that? We call it the sequence of withdrawals. The sequence of withdrawals is one of the biggest secrets to minimizing your taxes throughout your lifetime in retirement. 

To do it right, what you need is first, a comprehensive financial plan done, and then a CPA that’s working alongside the CERTIFIED FINANCIAL PLANNER™ to review that plan from a tax perspective and put together that forward-looking tax strategy. That’s what our Guided Retirement System™ does for you. 

Let’s start a conversation through a complimentary consultation. We can do that through a Zoom meeting, over the phone, or an in-person meeting. Click here for your complimentary consultation.

Bud Kasper: It’s a very eerie thought, but don’t get sucked into paying more taxes than you have to when you have options out there that will reduce your tax liability. And we’re here to help you with that.

Dean Barber:

It’s interesting because when you sit back and think about all of the unknowns out there, it’s the unknowns that scare us. It’s the unknowns that give us uncertainty. That’s why it’s scarier in the dark than it is in the daytime because you can’t see what’s right in front of you. 

Listen, we have decades of experience. We know what’s in front of you. We’ve seen it before, and it’s not that scary if you know how to address it. 

It doesn’t have to be scary. It can be bright and shiny, and it can be a fantastic retirement. We’ve seen it happen before, many, many, many times, and we want to help you accomplish the same thing.

I’m Dean Barber, along with Bud Kasper. Thanks for joining us today. Enjoy the rest of your day. We’ll be back with you next week, same time, same place.