Hi. This is Dave Piatkowski with Dickinson Investments. I would just like to take the time today to share with you a few retirement blind spots. These are things that over the years that people that I’ve had the good fortune to work with have either forgotten we’ve discussed or just not top of mind and it surprises them a bit in retirement and these four items tend to be coming up more often than some of the others. So I just thought it would be a great time to put a quick video together and share them with the group.
First and not necessarily foremost is the first few years in retirement, if there is a large market downturn, how that can affect your retirement. In other words, if someone has $100,000 and the market goes down 25 percent and now they only have $75,000 or if they have a million dollars and it goes down to $750,000. Whatever you’re taking out, whether it’s the traditional four percent withdrawal rule or any variation of that, it’s going to have a big effect on your longevity in retirement in terms of your ability to stay retired and not run out of money.
Some people for the short term will just take less out. Some people will plan ahead and maybe say, “I want this much in cash or 12 months in cash of my funds, so that I’m not taking out of the money that’s invested,” or some variation of that.
It’s important when you head into retirement, to realize that a large downturn meaning not a small correction of five or ten percent in the market, but a significant downturn of 20 or 30 percent or more can have a significant impact on your ability to stay retired for the long run comfortably.
Second, inflation will take a large effect on those payments you’re receiving. So whether it’s a pension that is just without a cost of living on it or your take in a monthly amount that’s static, out of your retirement accounts, over time, people come back and they say, “Hey, that $2,000 or $5,000 a month, or whatever it is you’re sending us in addition to Social Security just doesn’t seem to be covering the bills the way it used to,” and many times they’re surprised. They forget that, you know what, either every year or every other year, we have to slightly take out a little bit more percentage-wise to give you a little cost of living.
Kind of like when you’re working and you get a cost of living raise in your salary. Same holds true for your retirement. People just forget about it and how that might have an effect on your ability to stay retired as well.
Third, you and your employer have put money away over the years typically in a 401(k) or 403(b) or a simple IRA or any one of these kinds of retirement plans. But in almost all cases, these funds went into these retirement plans on a pretax basis. So if you’ve got that $100,000 or a million or five million or whatever it may be, it’s not the pot of money that you perceive it to be because it’s all going to be taxed as it comes out and depending on what tax bracket you’re in, anywhere from 10 to 30 percent – in some cases more than that. But that’s typically a good range that would be taken out of there.
So you have to be cognizant that if you’re taking $1,000 out, that you’re going to lose anywhere from $150 to $300 of that to taxes on a regular basis. So the gross and the net take effect. Kind of like when you were a kid and the first paycheck you got when you were in high school or college and you said, “Who’s this FICA guy who took so much of my paycheck?”
Similar kind of thing but one of the positives is that none of this income from your retirement accounts is subject to Social Security taxes; just regular federal and state taxes. But it is something to be cognizant of.
Finally, many times, those that we work with, if they look like it will be short for them in retirement in terms of being able to meet all their needs, many of them will say something to the effect of, “I just plan to work until I can’t work anymore or at least I will do part-time work and that will make up the difference of the gap.” The real issue becomes many times for many people, it’s not realistic for them either mentally or physically.
They get to a point where they just can’t work in any real capacity or if they’re fortunate enough that they can work many years, sometimes a spouse or a loved one they have to care for makes it so they can’t leave the house regularly to go work. So if your plans are that you think that you’re going to be working part-time in some capacity to make an income, at least the early years of retirement, realize that may not come to fruition as well.
But these four items I think are worth bringing up so that people are cognizant of a few of these blind spots in retirement so that when they go in, their eyes are wide open and they know what to expect. Thanks.
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]