Thinking You Should Delay Your Retirement Date? Consider This...
Adam: A recent study released in August of this year noted that 39% of American workers, that's 68 million people, are planning on changing the timing of their retirement. What are the reasons for making that decision and how should you address them if you are also thinking about changing your retirement date? John Conley and I discuss that on this episode of After The Paycheck. Welcome to After The Paycheck, the series dedicated to helping to and through their retirement process. This week I am here with John Conley, partner here at Rubino and Liang Wealth Partners.
John Conley: Always a pleasure to be here with you, Adam.
Adam: I'm glad to have you. This week we are going to discuss a topic that... When this article that came out in August, we both saw it and said," Okay, wow, this is really interesting. It's something we should discuss," with a lot of people that are currently talking to you in the firm, people that have, with everything going on in the world right now, are reassessing when they need to retire or when they think they need to retire.
John Conley: Sure. Yeah, that Forbes article, I believe it said what, 39% of people polled are changing their retirement date. And that amounts to what, 68 million people we read, which was a lot of people. And it falls in with a lot of the questions that we're getting from people who listen to our radio show, who come into the office. It seems to be a concern that most people are having.
Adam: Right. It seems like the reasons that these people had to reassess their retirement date, their planned retirement date, is because they had to dip into their savings. Either they got laid off from their jobs and they can't contribute to the 401( k) s anymore or there's just uncertainty about what benefits are going to be available to them in the near future.
John Conley: Big concerns.
Adam: Yeah. So I guess that's what we want to discuss today, is really address if you're somebody who is within that 10- year window of retirement, if you are thinking," Oh man, I think I do have to push back my retirement," what are the reasons why you might be thinking that and how are you able to address that and overcome those, I don't want to say reasons or excuses, but some of those concerns that they might have heading into retirement.
John Conley: Sure. Cool.
Adam: So what would you say are the three reasons why somebody might feel less confident about their retirement situation?
John Conley: Well, especially in this day and age with COVID and the economy and the market. We have an election coming up that will have an effect on the economy as well. And I think people are uncertain, where in the first quarter of 2020 COVID happened and the market corrected itself, and I think people's savings, their retirement accounts took a big hit. And they made them realize how fast things can turn. Not everything goes up. We've been on a nice little run for a few years here. So I think it made people realize that or make them feel weaker or vulnerable, so to say. And I think some people are considering pushing off retirement because maybe they haven't saved enough. Maybe they were maybe taking on too much risk trying to catch up, trying to take on risk, get higher returns to make up for some of those years that they might not have been contributing enough to their retirement. And then when it corrected, it hurt them even more so, and they take on too much risk. And then I think some people are just unsure of where they stand. They don't have a plan in place. They don't have an advisor. They might be a great saver and contributing to their 401( k), but they might not have a plan in place that shows them that they can retire with confidence. And then that's important, to have that plan.
Adam: So let's get into creating that plan or understanding, okay, here are the steps I need to get to that knowing what I need to do next. And I think one of the first things we have to discuss is understanding what your costs are going to be in retirement, right?
John Conley: Sure. Like anything, you're doing a retirement plan, you want to get an indication of what are your expenses going to be in retirement? How do I foresee myself spending retirement? Am I down in Florida for six months? Am I just up here spending time with the grandkids and going to all their sporting events and all their events and maybe not be a snowbird down in Florida. But you want to get a good idea of what your expenses are going to be and where's your income going to come from? And is there a gap there between the two, how are we going to fill that gap? Back in the day there used to be the three- legged stool that we talk about all the time. And one of the legs of the stool was a pension, people would get a pension. The other leg was Social Security. And then the third leg of that stool was what you saved and your withdrawals from that savings made up that third leg. Well today, pensions are almost a thing of the past. Social Security, which we'll talk about, is in question. So that puts more of an onus on your savings and your investments. That's going to be paramount, of how much you've saved and how much you have to count on to withdraw from your portfolio.
Adam: What's a way that I can, if I am someone nearing retirement and need to calculate those expenses, what are some things I also need to consider? Not just, like you said, monthly income, but you said inflation and stuff like that, there's cost of living adjustments and stuff like that. Is there something that I can just do today to just sit down, or I guess it really is just sitting down, and we've said this in previous episodes.
John Conley: Yeah, you sit down and you take a look at... What I think most people make a mistake, and I met an individual the other day and he thought he was on easy street to retirement in two to three years. And when we really crunched the numbers, we went through our process with him, it wasn't as rainbows as he thought it was. The individual forgot to take inflation into consideration. So in his, just in an easy example, he had a million dollars. He needed 80 grand to live on. He was going to collect 40, 000 between him and his wife from Social Security. So the way he looked at it was, I only need 40, 000 from my million each year, which is a 4% rate of return just to take 4% off the top, keep principal alive, or protect the principal. But he didn't take in taxes, didn't take in inflation. So that 40,000 today might be 55,000 in 10 years. That's a much different withdrawal rate. Now it's five and a half percent plus you owe taxes on that withdrawal. So then all of a sudden your portfolio has to work a little bit harder than you think it does.
Adam: Do you think us discussing this right now, like you said, this person thought he was on easy street," Oh, I only need my portfolio to do 4% every year to maintain my lifestyle in retirement." Do you think that contributes to part of those 39% of Americans that are saying," Maybe I should keep working for three to five years because I'm not considering this, that or the other thing."
John Conley: Yeah, he was on the flip side. He thought he was fine to stay on his target. Other individuals are saying," If I retire now." So let's take an individual who might be looking to retire in the next year or two. This is a difficult time to be retiring, right? So if you have the ability to continue to work, you feel more comfortable of receiving a paycheck, a salary, versus stop working, live on a fixed income, Social Security, and any withdrawals from your portfolio. That means your portfolio is now having to work for you in an uncertain time, right? We're seeing volatility. So there's a thing called sequence of returns. So if the market's going down your first two or three years in retirement, and you're making withdrawals in that time period, well, that's a different scenario then if the market was going up for two or three years and you're making withdrawals. So some people are concerned about coming down that homestretch today in such uncertain times. They're thinking," Maybe it might be better for me to just continue working, use my salary versus my savings."
Adam: So what would be a reason why it wouldn't be a good idea for me to keep working three to five years?
John Conley: I look at it, there's no real clear cut reason why you should work or not work, so to say. I think if you can continue to work and you might not have saved enough, you should continue to work or allow your money to maybe recoup what it lost in the first quarter of this year. It's a case by case situation. But I think if you haven't saved enough or you're concerned about the volatility, you should continue to work, if you can, inaudible you want to. One thing I realized when working with our clients is when they finally are financially independent and they can retire and we've met their goals of, hey, today's the day, you can retire if you really wanted to. More often than not, some people say," You know what? I'm going to continue working, not heavy lifting. I'd rather use my salary versus my savings." Feels good knowing I can go to work tomorrow and I could walk out the door. I don't need the job, so the job doesn't become this weight that is wearing you down, like your early years when you're working, because you have to. Now it's a choice. So it makes going to work a little bit easier.
Adam: Okay. So if I am unsure if I need the job or if I want the job, how do I determine that?
John Conley: Having a plan. Understanding where you are on this journey. If you're five to 10 years away from retiring, and you don't have a plan, create a plan. Get an understanding where you are so that we can make the necessary adjustments that have an immediate impact on your overall picture down the road. It's like going into a doctor's office, early detection is best, right? So if you're not on the right path and you're five to 10 years out, we can make changes that will get you back on path, correct? But if you come in a year or two before you are hoping to retire and you realize," I'm nowhere near where I should be," then it's more difficult, right? So get a plan in place. Understand where you are. Find out what's good what's bad, and what changes need to be made.
Adam: Okay. So you're making the distinction between you might still want to work for three to five years, but that doesn't mean you should delay on having some sort of an exit plan for your retirement. If you haven't saved enough already, what is your change going to be that is going to make you all of a sudden be ready to retire in three to four years? Other than just," Oh, I'm upping my contributions," right? If you don't know how much you actually need.
John Conley: And you don't understand how much you got to save between now and then. What's the average return I need to get to where I want to get to? You just kicking the can down the road by practicing maybe the same bad habits or behaviors that you had before. But working with an advisor in helping you, someone who's on the same team as you, and saying," Hey, this is what we need to save on a yearly basis. This is the rate of return that you need to get you to that end game." Just because you want to stop working in three to five years, doesn't mean you can, okay? But on the flip side, if we do things right, maybe you can retire sooner than you were hoping to.
Adam: Right. What about people who are opting to work longer because they don't think they're going to have certain government beneficiaries or benefits?
John Conley: That's a big concern everyone has. You keep reading about Social Security and how much strain its under, right? What happens with Social Security is that in the trust fund today, there's enough money in there to pay the benefits until 2035, 2037, different studies show different things. But it will pay enough of the benefits until 2037. Then when the reserves in the trust runs up, at that point in time the benefits might actually be reduced by 26%. So that's a concern that a lot of people have, that are living on a fixed income once you stop working is that is one of the big legs of that retirement stool that we talked about. So all of a sudden, your Social Security could get hit by a 26% loss of income. How do we make up that, okay? So when you work with someone and you have an advisor, they'll show you that this is what your Social Security looks like today, but let's also take into consideration 2035, 2037, in that range, let's reduce that Social Security by 25% in your income, and what effect does that have moving forward? It's going to put more strain on your savings that you have to draw more from, or you might have to alter your plans. Maybe I work longer. Maybe I don't spend as much. So lets get that moving and looked at prior to making any decisions of when you want to retire.
Adam: How often when you sit down with somebody, when you're like," Hey, it looks like if we run these scenarios your probability of success in retirement is 80%, but if we make these small tweaks it'll be a 100." Do you get a lot of pushback from people when they're like," No, I need to have my monthly subscription to Boy Scout Magazine," or whatever it might be.
John Conley: I think as you get older you start to realize that you can go without, right? And what I try to tell my clients before they retire and we're coming down that nitty gritty, we're there, we know we're there. But anytime I have to... I'll use my parents as an example. They had to drive somewhere that was uncomfortable for them or somewhere they don't go all that often. They used to take the Saturday and drive out to wherever they were going for Thursday to get a dry run. And I always say," Dry run's not a bad idea, it makes you more comfortable with it." So before you retire, why don't we take a dry run on spending? Let's start practicing your spending habits. If all of a sudden you're spending 80 grand a year today and your retirement goal was," When I stop working, I'm only going to have to spend 60,000," well, let's start practicing that. Where are we going to cut things out? How are you going to... Can you live like that? Is it comfortable for you? Let's do a dry run before you officially kick the can and call it quits, cold turkey.
Adam: Right. So to me it sounds like if I am someone who is in this boat of," Hey, I was hoping to retire within the next five years, but I'm not sure, so I might have to work another three." Before I really commit to any of those things, some action items I can take from this is to really sit down and figure out what my current budget needs are, what my essential expenses are going to be, and what my lifestyle expenses are, and then really map out what I'm going to need per month. And that doesn't really take into account inflation and stuff like that.
John Conley: Inflation, taxes, and then you have to look at longevity, right? How long do you think you're going to live for? I have clients that come in and say," Oh, I'm only going to live to 84." And they're 72. So I'm like," Well, I hope you live longer than 84." But I'm not going to project that you're going to die at 84. So let's run this out to 95. The plan works if you're living to 95, it will work if you'd pass away at 84. So let's not project that you're going to pass away at a young age. Let's look at it longevity wise. Because if all of a sudden we plan you passed away at 84 and you don't, well we'll have trouble. And also people change their spending habits in retirement. What you spend today doesn't necessarily what you're going to continue spending in the future. Most people do spend less, but let's not project that we're going to spend less, but you end up spending less things. You don't want to go out to dinner as much, travel becomes a little bit more of a pain in the rear end. So you do alter your spending, but when you work with an advisor and you sit down and you have an annual review, alter that, let's change your spending habits to reflect what's really happening. Or you might actually spend more in the early years versus the later years, so let's build that into the plan. Some of my clients say," Hey, I want to travel a lot in my first 10 years." So let's build that balloon payment of travel into your plan, so that's already accounted for.
Adam: So that actually is the next part of what I think would be my action items. So I'm creating that initial budget, essential and lifestyle expenses. Think about what it is I want to do in my first few years of retirement. Do I want to either sit, travel, spend more time with family, friends, whatever it may be and factor that into what is going to be your expenses, right? So you have an additional expenses on top of what your initial thought of what your expenses are. And then try to start to map that out, okay, if I'm going to be doing this and not have an end age in date, but realize, okay, is the amount I'm going to have going to sustain for multiple years. Just, hey, I'm going to slide into the grave with pennies in my pocket, right before I go.
John Conley: But on the flip side, a positive of doing this. So let's say we go through the process and you're hoping to retire in five to six years. And we go through the process and we realize you're well on your way, you've done a great job saving, you're a fantastic saver. You've gone without, you sacrificed. So your spending needs are in line with what you saved. But then we go through your portfolio, we realize that you're being super aggressive and you're trying to hit the home run all the time when you've already won the game. So why do we want to be so aggressive when all you want to do is get on first base, you don't need a home run. So then you can alter your risk tolerance based on where you are today. But if you haven't saved enough, now you might have to be a little bit more aggressive than what you're comfortable with, but that's the situation you're in. But on the flip side, why be aggressive when we don't have to be?
Adam: Yeah, I think the analogy would be if you're already on third base, because over the years you've hit so many singles and doubles and everything that you're ready to hit home, all you need is a single to bring you home. Yeah, yeah, yeah, I like that, that's a good analogy. So that would be the third step in the action item, is once you have these rough numbers where you have your portfolio and everything, take it to somebody, a professional who can actually dissect all of this and run plans and say," Hey, here's where we can make sure you are going to be successful," or" Here's where we need to make some tweaks to ensure that you have a greater chance or a greater probability of success in retirement."
John Conley: Absolutely. We want everyone to retire with confidence, that when you finally turn in that pink slip and say," I'm done," you're comfortable. You're ready. You're confident that you don't have to go back to work, and that it's not going to alter and change and you're going to lose so much money that you have to go back to work. Your plan should be in alignment with your risk tolerance, what you're trying to accomplish, and you should always retire with confidence.
Adam: You get to retire because you want to not because you have to.
John Conley: Exactly.
Adam: Yeah. Awesome. John, thank you very much for covering this. I know that this is a weird topic where everyone's wondering when they can retire or not or should I push out my retirement?
John Conley: Yeah, it's timely. You got a lot of different people with a lot of different concerns where the companies they work for, they might've made the person a part- time employee. So now they're not contributing as much as they used to to their 401( k) because all of a sudden their work has changed and they're not working, they're not earning as much. Maybe the company changed the rules on the 401( k), they're not matching because the company is not a on solid footing right now. So there's a lot of different moving parts here, and a lot of people have a lot of concerns. I encourage everyone to reach out, talk to an advisor. There's no such thing as a foolish question. Seek advice, get advice. I always say," Measure twice, cut once." Double and triple check everything. Get an understanding of where you are today.
Adam: And it's important to have somebody who's not emotionally attached to everything to have, not a say in it, but to bring stuff to your attention that you might not have been aware of previously. You're so emotionally hot because you got cut to part- time or maybe your company got bought out or whatever.
John Conley: I talk about discipline a lot. I always say," You got to have discipline in these uncertain times." This is where discipline is crucial and paramount. We have to be disciplined during these times. We don't want to make long- term decisions based on something that's short- term. But the same point, you don't want to put your head in the sand and say," It will come back." Well, it might take a while for it to come back. What are we doing in the meantime to minimize any type of losses or take advantage of the run- up of the recovery when it does happen? So discipline is key. And like you said, don't let the emotions get in the way.
Adam: Right. Awesome. John, thank you very much.
John Conley: You're welcome. My pleasure. It's my favorite part of the job here.
Adam: We have that on record. If you have any questions for John or anyone here at Rubino and Liang Wealth Partners, feel free to fill out a form at afterthepaycheck. com. If you're not already subscribed to episodes of After The Paycheck, you can do that at afterthepaycheck. com as well, or wherever you get your podcast. Just search for After The Paycheck. Until next time, take care.