Want to Retire in 10 Years? Here’s What You Need to Know
Key Points – Want to Retire in 10 Years? Here’s What You Need to Know
- The Sooner You Start Planning for Retirement, the Better
- Do You Want to Retire in 10 Years? Make Sure to Create a Financial Plan That Shows You Your Probability of Success
- Working with a Team of Financial Professionals That’s Working for You
- That the Key Components of a Financial Plan Are Highly Correlated with Each Other
- 17 Minutes to Read | 34 Minutes to Listen
Are You Wanting to Retire in the Next 10, 15, or 20 Years?
Has retirement been on your mind a lot lately? That’s understandable, but you can’t just stew about it and make a spur-of-the-moment decision of when you’ll retire. You need to plan for retirement by creating a financial plan and then adjusting it as your life and economic conditions change.
So, let’s say you want to retire in 10 years. What do you need to do to start planning for retirement? Bud Kasper, CFP® and Logan DeGraeve, CFP® discuss how to begin building a financial plan, what all you need to consider when planning for retirement, and much more on America’s Wealth Management Show.
What You Need to Know to Retire Successfully
Let’s stick with that 10-year mark as we discuss the importance of retirement planning. Of course, you can start planning for retirement earlier (kudos to you if you are). And in some cases, you can get away with beginning the retirement planning process less than 10 years from when you want to retire. The sooner you start to plan for retirement, the better, but 10 years from your desired retirement date is that time that you really need to start focusing on what you need to do to retire successfully.
The biggest obstacle for most people when it comes to retirement planning is where to start. Well, as you’re creating your financial plan, you need to do so with your goals in mind. You don’t want to retire and then decide what you want to do in retirement. Why? Because that could drastically change the probability of success of your retirement. More on that in just a bit.
Maybe You Don’t Need to Wait 10 Years to Retire
There have been many instances in which we meet with someone for the first time who wants to retire in 10 years, and they end up sticking to that timeline and retire in 10 years. However, there have been many other occasions where we’ve shown people that they don’t need to wait to retire in 10 years. They can retire sooner if they do the proper planning.
“How many times have you (Bud) met with someone who thinks they’re going to retire in 10 years because they think they need to work until 65 to reach Medicare age or 67 since that’s their full retirement age for Social Security? But the reality is that there are a lot of times where people want to retire in 10 years, but they can retire in seven years. Maybe with some proper planning, they can retire in five or six years. I think it’s important to start early.” – Logan DeGraeve
Of course, there is a cost to retiring prior to 65 with paying for your own health insurance. That can be very complicated, which makes planning for retirement that much more important.
Starting to Plan Early Is Key If You Want to Retire in 10 Years (or Sooner)
It’s always a joy to break the news to people that they can retire sooner than they anticipated, but even if they can, getting to that point isn’t simple. There are several questions that need to be addressed when planning for retirement. We’ve listed 30 questions that gauge your retirement readiness and an age-based timeline of things to consider when retirement planning in our Retirement Plan Checklist. Make sure to download your copy below so nothing will be slipping through the cracks while you’re preparing for retirement.
What Are You Going to Spend in Retirement?
We talked a little bit about your goals for retirement and how important they are to incorporate into your financial plan. Well, many of those goals have a price tag associated with them. Once you retire, whether that’s in 10 years, 20 years, or whenever, you’re going to rely on your money to work for you rather than you working for your money. It’s critical to create a spending plan for retirement.
“That’s really the engine that drives your plan. What is your spending going to be? If you want to retire in 10 years—that could mean that you’re 40, 50, 60 and your kids could be close to getting out of the house—you can start to realize on a monthly basis what you need to do the things that you want to do and maintain the same lifestyle. Let’s be honest. When you retire, every day is a Saturday.” – Logan DeGraeve
If you don’t know what you’re spending a good place to start is figuring out what you net. How much is left in savings? If your savings aren’t building up, then that’s what you’re spending.
Finding a Professional (or Better Yet, a Team of Professionals) That You Can Trust
Getting all your ducks in a row when you’re preparing to retire can be overwhelming. As you’re determining your goals for retirement and how much you want to spend, you need to make sure you’re working with a CFP® Professional. Anyone can call themselves a financial planner. A CFP® Professional must go through an extensive certification process and board exams. CFP® Professionals are trained to understand all the ins and outs of investments, insurance, taxes, estate planning, Social Security, and much more.
All those things matter as you’re 10 years out from retirement and at various other stages of the retirement planning process. There’s a big difference in the capabilities of an investment advisor and a CFP® Professional. An investment plan isn’t going to save you in times of economic uncertainty. Just look at what’s happened over the past year or so. It’s the CFP® Professional’s responsibility to learn how you think and feel about money and help gauge your retirement readiness so that you can make educated decisions on your financial future.
“There are some many nuances associated with it. When should you take Social Security? What impacts your Medicare? You don’t want to pay additional premiums. What triggers that? Health insurance is incredibly important.” – Bud Kasper
Tackling Taxes Before They Get Out of Control Closer to Retirement
Taxes are another big wealth-eroding factor in retirement as well. And we’ve seen recently that inflation can be too. If there’s a way we can control that, we need to express that to people, especially if they’re wanting to retire in 10 years or less.
Taxes is one of the big reasons why the timeframe of retiring in 10 to 15 years matters so much. If all you have is tax-deferred money when you retire, you won’t have a lot of spending flexibility. You need to have a balance of tax-deferred, taxable, and tax-free assets. We’re going to really focus on those tax-free assets, but having tax diversification is critical.
What Other Professionals Can Help You Plan for Retirement?
Speaking of taxes, we also want to highlight why it’s important for your CPA to be working alongside your CFP® Professional. The CPA reviews your plan from a tax perspective to see what tax planning opportunities that you can utilize. Along with having CPAs in-house, we also have estate planning attorneys and insurance experts that work with our CFP® Professionals to get the best outcome for our clients.
“When you want to retire in 10 years and come to us, that’s when you can set the foundation for these relationships. Quite often, people won’t want to do their own taxes in retirement. Hopefully, you don’t wait 10 years until retirement to start the estate planning process. Everyone needs some level of estate planning, whether it be health care directives or powers of attorney. And then there’s insurance. Maybe you’re planning to spend $6,000 net a month. Well, your insurance might take up $1,500-$2,000 of that.” – Logan DeGraeve
Are You Working with a Fiduciary?
Let’s spend a little bit more time on distinguishing what a CFP® Professional does compared to an investment advisor. It’s important to understand that most investment advisors aren’t fiduciaries. A fiduciary is someone who legally puts their clients’ needs before their own. CFP® Professionals should be doing that anyhow, but they are legally bound to do so.
With fiduciaries, there won’t be a bunch of commissions. And if there are, they will be disclosed. There aren’t high internal expenses on the funds. Because there are two costs of investing. There’s a management fee that you might pay someone and then there are internal costs that the fund manager receives. It’s very hard to be a fiduciary if you’re only looking at investments. If a CFP® Professional isn’t looking at things like taxes, insurance, and estate planning, they don’t really have their clients’ best interests.
Upholding a Fiduciary Standard
Also, if you need to call your advisor every time that you want to talk to them, they’re not holding a fiduciary standard. They should be doing due diligence and making sure your plan is up to date. Because as we mentioned earlier, your life and the economy are going to change over time, so your plan needs to reflect those changes. The other red flag with realizing you might not be working with a fiduciary is if they only want to discuss your investments.
We need to know a lot about you before we know how your money needs to be managed. We want to marry your financial plan with your investment plan. On the flip side, Bud and Logan can see a red flag if they’re meeting with someone for the first time and they immediately want to talk about their investments.
“That really irritates you personally. If someone doesn’t meet with us to discuss who they are and what they want to do, how in the world can we decide what your investments should be doing for you? That’s something that you should be doing if you want to retire in 10 years.” – Logan DeGraeve
Stress Testing Your Financial Plan
Bud has come across many examples of meeting with clients where he’s realized how important it is to uphold a fiduciary standard. One time, we met with a client that was preparing for retirement that wanted to add on a swimming pool to their house. Well, that wasn’t in the client’s original plan. So, Bud wanted to incorporate all the costs associated with the pool into the client’s plan through stress testing. The probability of success of that client’s retirement fell from 92% to 81% when the pool was added to the plan.
“In reference to that, the client was asking what that really meant to him. It means that he increased the chance that he might not have the money that he needs for the rest of his life. We needed to make a course correction. He was still employed, so I asked him if he could work another year. He wanted the pool, so he said he could do that.” – Bud Kasper
Bud could have easily told the client that they could buy the pool and still retire as planned to make the client happy. But Bud wouldn’t have been uploading a fiduciary standard by doing that. Remember that there are no do-overs in retirement, so it’s critical to be working with financial professionals who have your best interests at heart.
Are You Overspending? … You Need to Be Careful of That If You Plan to Retire in 10 Years or Less
Bud’s story prompted Logan to think of a story he had from one of his clients as well. The client couple came into visit with Logan and was a little bit worried about the markets. Logan was honest with them that they were overspending. It wasn’t a continual problem, but they spent a lot more than was laid out in their plan last year. But they had no idea what they had spent.
“What I did was take their net Social Security benefit, their net from their accounts at TD Ameritrade, and asked them if they had any idea of what they spent last year. They guessed $60,000-$70,000, but they spent $110,000. They had this look on their faces and were worried that they’d just spent away their retirement. I told them they hadn’t done so and that they were still fine. Their probability of success and financial plan was still fine. But if they continued to spend like that year after year, they were going to have a problem.” – Logan DeGraeve
The Clarity That Comes from a Financial Plan
The thing is that Logan could not have determined that if a financial plan weren’t in place. Neither could Bud with his example. It’s important to remember that retirement planning is a series of trade-offs. Bud’s client needs to work another year to get his pool. And Logan’s clients need to cut down on their spending to ensure that they won’t run out of money in retirement.
Also, think about what might have happened if there hadn’t been a financial plan in place in either scenario. They wouldn’t have had the clarity they needed to make the necessary course corrections in a timely manner. The fear of running out of money is a very real fear that can begin to creep in. And that fear can quickly turn into a reality for those without a financial plan.
What’s Your Probability of Success?
The pain in the markets from 2022 made it that much more important for people to make sure their financial plan was up to date. Yes, the markets are back up a little bit so far in 2023, but how did the sharp decline in the markets from 2022 impact your probability of success? That’s why it’s so critical to keep the lines of communication open with your financial advisor. Your financial plan should be a fluid comprehensive plan. It’s not something that you create and then you’re done with it.
“What are the probabilities of success in retirement? I gave a speech last week to a small group of people. As I went around the room, I ask people individually, ‘Do you know your probability of success in retirement?’ When I pointed to them, they’d say, ‘Uh, no.’ I then said, ‘Then how do you know if you’re ready to retire to the extent that your money will last you for the rest of your life? Have you considered what Social Security is going to mean to you? How much savings do you have and how can you supplement that into what your income need is? How are taxes taking away from your ability to spend and can you save more with a good tax strategy.’ Those are just a few elements of planning for retirement in a meaningful and exact way.” – Bud Kasper
The Key Components of a Financial Plan Complement Each Other
One thing that you should notice with a financial plan is how some of those things that Bud just mentioned work together. It’s the CFP® Professional’s job to take your assets and make them work in the most tax-efficient way possible. Social Security is a piece of that. But if you take Social Security, that changes your taxes in retirement. Most people that want to retire in 10 years or so and don’t have a plan don’t realize that.
“When you move one lever, another lever changes. You can’t look at Social Security in a vacuum. You can’t just say that you’re going to take it at 67 because some online retirement calculator told you to. There are a few considerations. Longevity matters, but what about your spouse? If one spouse passes, only the highest benefit stays. So, if you have one spouse that was a high earner and the other spouse wasn’t a high earner, that high earner might need to wait as long as possible (to claim Social Security).” – Logan DeGraeve
What to Consider When Claiming Social Security
Continuing with Logan’s example, let’s say that one spouse passes away at 80 and the other lives to 95. That’s 15 years that the surviving spouse is a single tax filer with only one Social Security benefit. You can probably start to see the problem that could happen if someone just automatically wants to turn on Social Security at 62 and doesn’t consider those other implications.
Social Security is guaranteed to grow every year that you don’t take it. Your investments, on the other hand, aren’t guaranteed to grow every year. Years like 2022 can obviously be rough on your portfolio. So, should you consider turning on Social Security five or six months earlier to take some strain off your portfolio?
But in previous years when the market was performing very well, hopefully you considered taking some gain off the table and letting Social Security grow since it’s a lifelong benefit. If you’re wondering about when you and/or your spouse should claim Social Security, check out our Social Security Decisions Guide for a few more tips.
Download: Social Security Decisions Guide
Do You Want to Retire in 10 Years? There Are Several Tax Planning Strategies That Should Be Considered
This is one of the main reasons why we have a team of CPAs as well. As we mentioned, how you claim your Social Security can have major tax implications. Our CPAs can help people understand those tax implications that could arise this year, next year, and years down the road. That’s what forward-looking tax planning is all about.
While our focus with this article is to discuss what people need to know if they want to retire in 10 or so years, we certainly aren’t forgetting about the ongoing planning that needs to be done in retirement as well. There are a lot of retirees who have probably experienced a clean tax environment so far in retirement. They might have turned on Social Security or taken some IRA withdrawals.
Don’t Forget About RMDs
One of the big things that can disrupt that clean tax environment are Required Minimum Distributions. That’s when you must start taking distributions out of your 401(k) and IRAs. Following the passing of the SECURE Act 2.0, the RMD age is now 73. Once you hit RMD age, your Social Security may go from not being taxable to up to 85% taxable. That’s a huge increase in taxes. So, how do you plan for that? That’s why if you want to retire in 10 years or so, you need to start planning well in advance of your required beginning date for RMDs. You might consider Roth conversions, Qualified Charitable Distributions, or other tax planning strategies.
“Tax planning is forward-looking. The hay is in the barn for the year by the time we get to October or November. In December, we may do some Roth conversions. But when we’re looking at tax planning, we’re looking at getting you in a better situation for future years. When people come to us now in March and say that the owe a lot of money in taxes last year, they ask what they can do. Not a darn thing.” – Logan DeGraeve
The new RMD age of 73 is one of several important retirement planning milestone that we noted on our 2023 Retirement Planning Calendar. The calendar is full of pivotal milestones, dates, events, and much more that can impact your retirement, so make sure to download your copy below.
2023 Retirement Planning Calendar
An Abundance of Roth Conversions in the Fourth Quarter of 2022
Bud has nearly 40 years of experience in the financial services industry, so there isn’t much that he hasn’t seen. Staying on the topic of taxes, one thing that blew Bud away last year was the number of Roth conversions that he did for clients at the end of 2022.
“I’m positive that we did more Roth conversions in the fourth quarter of last year—ones that we should’ve been doing in the third quarter—than I ever have in my career.” – Bud Kasper
When we look at Roth conversions, it starts with the financial plan. Do we expect that your tax rate will increase in the future for things like Social Security, RMDs, or if your spouse passes away and you become a single tax filer? Well, we know if Congress does nothing that tax rates are going up in 2026. Therefore, does it make sense to speed up income in a year by moving money from a traditional IRA to a Roth IRA?
Is Now Still a Good Time to Consider Roth Conversions?
Let’s say that you do a $40,000 Roth conversion. You then must pay tax on that $40,000. Why would you want to do that? Well, there are a few reasons. One, you get money out of the IRA, which will lower the amount of your RMDs. And two, the money grows tax-free in the Roth IRA for the rest of your lifetime. Whether you take distributions from it or it gets passed to your heirs, the distributions are also tax-free.
The third reason is something that gets overlooked, though. We can lower the RMD amount via Roth conversions, but what happens when a spouse passes away unexpectedly and the surviving spouse becomes a single tax filer? Those RMDs don’t get any smaller for the surviving spouse. While you lose one Social Security benefit, the tax brackets for a single filer are much smaller.
Right now is a great time to consider Roth Conversions because the market is down. At some point, the market will get back to where it was and it will continue to grow. By doing a Roth conversion now, you’d get all the tax-free recovery and growth. Where do you start with Roth conversions? Again, you start by creating a financial plan and working with a CFP® Professional that’s working alongside a CPA that’s reviewing your plan for those tax planning opportunities.
The Roth 401(k) Match
We mentioned how SECURE 2.0 increased the RMD age from 72 to 73, but that was far from its only provision. Employers can now offer their company 401(k) match in a Roth format. Not only will your distributions be tax-free, but so will the match. It’s another example of why tax planning is critical, especially if you want to retire in the next 10 years.
You need to figure out what money you’re going to spend and where that money is going to come from. You have your tax-deferred, taxable, and tax-free buckets. To understand what your tax allocation needs to be, you need to have a financial plan. Whether you want to retire in 10 years or 30-plus years, knowing where to save and the tax ramifications of where you save is important. You can also get a better understanding of how retirement income is taxed by downloading our Tax Reduction Strategies guide.
Download: Tax Reduction Strategies
Another Example of Stress Testing Your Plan
That brings us back to the importance of stress testing your financial plan. What can ultimately hurt or break your plan? This made Bud think of a client of his who had a predicament with his pension. Before he retired, the interest rate that calculates how much the pension is going to be increased because of what the Federal Reserve has done.
“He ended up with 80% of what he thought he was going to get at retirement because of that. So, we had to go back and stress test his plan. Since he’s getting 20% less than what he put into the pension plan, would that upset his plan enough to where he would need to delay his retirement?” – Bud Kasper
Look at what can happen in a bad market. People don’t want to do anything with their account until its value comes back up. Well, maybe that’s a situation where a Roth conversion could be right for you.
And if you have positions that may be money market positions like short-term treasuries that are safe positions in an IRA, you can raise cash to convert from those. They haven’t been impacted by what has happened over the past 14-15 months. Move that to the Roth and you can buy stocks that could be at 15-20% discounts.
Stress Testing Isn’t Just for Troublesome Situations
We should add that stress testing isn’t always used in negative situations like that. You can stress test your plans for positive things like wanting to retire in less than 10 years. Or maybe you’re wanting to give more to your kids or grandkids and/or travel more.
“It irks me when people consistently have a 99% probability of success. That means that they’re overfunded to do the things that they want to do. They’re never going to run out of money despite stress testing their plan through the worst market times. I consistently tell them that if they don’t change their spending or giving or plan to retire sooner, they’re going to leave like $6 million behind. They’ll go, ‘No way. I don’t want leave $6 million behind.’ Then, we need to do something. That’s show how stress testing can be positive too.” – Logan DeGraeve
One Last Note on Stress Testing
As we wrap up this discussion on what you need to know if you want to retire in 10 years, there’s one more thing we want to note about stress testing. A big thing that we’re stress testing for is investment risk. If you want to retire in five to 10 years, you don’t want to be in the same allocation you were in when you started working. That could hinder your ability to retire when you want to.
Review These Topics If You Want to Retire in 10 Years (or Sooner)
Hopefully, you’re starting to understand the importance of starting to plan early for retirement. Whether you want to retire in 10 years or much further into the future, you need to have a financial plan to get started.
We can help get you started with that in a few different ways. First, you can use the same financial planning tool that our CFP® Professionals from the comfort of your own home. It can help bring to light how the different components of financial planning can personally impact you. And you can use it at no cost or obligation by clicking the “Start Planning” button below.
We also can’t emphasize enough how critical it is to work with a CFP® Professional who puts your interests first. Whether you’re planning to retire in 10 years or less or maybe closer to 15-20 years, you can schedule a meeting with one of our CFP® Professionals to get the ball rolling. You can schedule a 20-minute “ask anything” session or complimentary consultation—both are at no cost or obligation. We can meet with you in whatever setting you’re most comfort with, whether that’s in person, by phone, or virtually.
Want to Retire in 10 Years? Here’s What You Need to Know | Watch Guide
What Do You Want to Do in Retirement?: 01:28
What Are You Going to Spend?: 03:00
How Do You Get Started?: 05:17
Find Professional(s) You Can Trust: 07:18
What Is a Fiduciary?: 10:29
Things Change, Your Plan Needs to Be Flexible: 14:05
What Is Your Probability of Success in Retirement? 18:02
Taxes and Social Security: 19:08
Taxes in Retirement Change – RMDs & More: 22:30
Roth Conversions: 24:05
Stress Test Your Plan: 28:04
Resources Mentioned in this Episode
- Starting the Retirement Planning Process
- Understanding Your Tax Allocation
- The Guided Retirement System
- What Is a Monte Carlo Simulation?
- 6 Reasons Roth Conversions Could Work for You
- Setting Up a Spending Plan for Retirement
- New Retirement Rules Passed by Congress
- 5 Types of Financial Plans
- What Is Financial Planning?
- Your Retirement Timeline
- Stress Testing Your Financial Plan
- Retirement Plan Checklist
- 2023 Retirement Planning Calendar
- Tax Reduction Strategies
- Social Security Decisions Guide
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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.