How much risk should I take in retirement? It’s an important question, but I think that the financial industry has it wrong. And since they’ve got it wrong, this faulty method of risk management then gets passed on to investors and clients. In this post I’ll share a different way of looking at risk and what you could be doing instead.
But first, a story. A man sits down with his doctor and the doctor breaks the bad news that the man has cancer. The man is completely shocked. Then the doctor shows the man an iPad with a questionnaire to determine how much chemotherapy the man is comfortable with. The man looks up, even more shocked by this question, and says, “the least amount possible to get rid of the cancer, obviously!“
While that’s just a silly anecdote, it’s kind of how we usually look at risk as well. It’s common in the early meetings with an advisor for them to ask you about risk tolerance or to fill out a questionnaire. They then use that to try and pinpoint how comfortable you are with risk. But I’m not so sure that’s the best way to determine the how much risk you should have in your portfolio. Your risk tolerance today is going to look a lot different than it did back in March of 2020, when we saw one of the fastest drops to a bear market in history, or back in 2008 or 2009, when we thought we were in the worst of it.
If risk tolerance isn’t the ideal method to figure out how much risk you should have, what’s a better way?
First, I’ll share how we think about it at Streamline Financial, and then I’ll share some other big risks that you might want to be looking out for.
Here’s how we look at risk.
Rather than try to identify your risk tolerance and build an investment plan from that, at Streamline we focus first on the key factor in retirement: your future income. The whole purpose of retirement planning is making sure you have enough money coming in so that you can keep doing the things you want to do. We believe that once you create a solid income plan, that will dictate the risk of your investment plan and your asset allocation, and how much risk you should be taking on. That’s why we work with our clients to focus on an income plan before creating the investment plan, tax plan, and all the other parts of the system. We have found that we have a much better chance at creating a successful retirement plan when we do it this way. And our clients think so too.
If that makes sense to you and you’re planning for your retirement, but you may not be ready to talk with an advisor, or you’re just more comfortable doing it yourself, click here for a DIY retirement plan.
Now we’ll move on to some of the other risks you may face in retirement.
Many people think that market risk is the biggest risk. They worry if the next market crash could ruin their retirement. Market risk is important, but it can be covered with proper planning. The risk that most people don’t think about as much is kind of a silent killer. It’s the fact that the US dollar loses value over time. This means that $100,000 invested in 1970 could be worth only $50,000 in a relatively short amount of time. We call this cash risk or inflation risk. The reason it’s a silent killer is because you won’t get a statement showing a negative percentage return. It seems like it’s holding value. But as everything else around us gets more and more expensive and inflation goes up, that dollar value is actually decreasing every year.
Another big risk has to do with the year you choose to retire and start withdrawing funds. Someone who retired in 2007 could have a much different outcome than someone who retired three years later in 2010. The first few years of your income plan and withdrawal plan are absolutely critical. There is a graphic in the video above that illustrates this comparison of two retirees who did everything the same, except for the year in which they retired, with drastically different results. It was just the first few years of retirement that made all the difference.
In this post, we’re going to look at the pros and cons of working while collecting Social Security. Thought it’s not the best plan for everyone, there might be some instances where it could make sense for you.
Social Security usually considers full retirement age to be around 66 or 67. But if you’re around five years out and you are working and earning an income, and if you make over $18,960, then social security is going to deduct $1 for every $2 that you make over that amount of $18,960.
For example, if you make $28,960 ($10,000 over), divide that overage by 2 to see the deduction. In this case, $10,000 divided by 2 is $5,000. So, the Social Security Administration would be deducting $5,000 from your total benefits that year.
Know When Your Earnings Limit Goes Up
Be aware that in the year you reach your full retirement age, the earnings limit actually goes up to $50,520. As long as you earn less than that amount, then you shouldn’t have anything deducted from your pay. The SSA only counts your earnings up to the month before you reach your full retirement age, not earnings for the entire year.
Another thing to keep in mind when you’re looking at these calculations: once you do reach your FRA (full retirement age), you can earn whatever you want and you don’t have to worry about Social Security deducting.
Working Before Your Full Retirement Age
However, what if you retire at 63 and then go back to work at 64 with a salary over the aforementioned $18,960? What should you do?
Social Security says that the benefits they deduct are not lost forever. They also say that they will reconcile your benefits once you get to your full retirement age. However, we’ve seen the calculations that they use and it’s difficult to verify they’re actually paying you the right amount. It’s possible, but it’s just not a hundred percent clear. Every time we’ve tried to verify for a client, we really just have to take their word for it. And if you know anything about Social Security, you know that you don’t always get the same answer from two people in the same office.
For these reasons, I encourage people who are thinking that they might have a chance of working before they get to full retirement age, even if they already are retired, if there’s a small chance they might go back, I encourage waiting. But don’t just listen to me. Talk to your retirement planner and create your income plan. See what Social Security strategies make the most sense for you. If you don’t have a planner who specializes in retirement, reach out to me by clicking the link here.
Doing these five things is going to help you get set up the right way for your future retirement. So if you’re thinking that you might be five years out, or even if you might be a little bit closer, this post will be helpful for you.
First, don’t think about the numbers just yet.
Start out by thinking about your reason why behind wanting to retire. This is critical because while we’ve seen a lot of people who feel fulfilled in retirement, we also see people who feel bored or lost in retirement. Finding your motivation and your why behind retiring is a very key part to enjoying this next stage of life. Here’s a good question to ask yourself: what would I be able to do in retirement that I can’t do now?
And as a side note, we’ve heard from quite a few people who retire and then wonder a few months in: is this it? What am I supposed to be doing all day? And it’s quite an adjustment. It takes a while to get back to a point where they feel like they’re moving in the right direction. So, think about that question or click here to request a guide on How To Find Your Purpose In Retirement.
One other thought related to this point is: rather than thinking that you have to go cold turkey, from working 40 or 50 hours to zero, think about what-semi retirement can look like. Consider going to half-time, or maybe a different position in a different place that would be less stressful. That could be a great way to transition into this new stage of life.
Second, take a guess at what your monthly expenses are going to be in retirement.
What are your monthly expenses going to be in retirement? How much would you need to have coming in to cover those expenses? And then, look at your current expenses, or think about whether expenses are going to go up or down for you in retirement and start to think about those numbers. There are some helpful tools out there that can help automatically track your expenses now and categorize them for you. For example, mint.com is a free app that helps categorize things so you can look at expenses more closely.
Third, look at, and research, your healthcare options.
Here are a couple of things to look into:
Check with HR to see if there any options for after you leave work.
Look at your spouse’s plan and their options. Are you going to hop on your spouse’s plan for a few years before 65? Check and see how much it would cost.
If you’re under 65, what would health insurance cost before you get to that Medicare age?
Fourth, get organized on your future income sources and assets.
Log on to ssa.gov, to check your Social Security and write it down. Also write down any pension income. Look at your 401ks, IRAs, and other accounts that you may draw from in retirement. And then with those pre-tax accounts, think about what age you can begin withdrawing without a penalty. You may have to wait until age 59 and a half, and there are some 401ks that allow you to take money out at 55 and not pay a penalty.
Then also look at how when you start collecting Social Security, it can impact how much you get each month. Click here to see a video on working while also taking social security.
Then run at least three retirement calculators. I created the “How Much Do I Need To Retire?” quiz, which you can access by clicking here. Another retirement calculator that I like is from Nerd Wallet. You can also just Google retirement calculator and see what comes up.
Finally, start tracking your net worth.
Tracking your net worth is so important because once you figure out the income and the assets that you’ll need in retirement, then the net worth number can be a great way, and one of the easiest ways, to make sure that you’re on track to get to those goals that you had written down. Again, mint.com is one way that you can track net worth. Here at Streamline, we actually create a private dashboard for our clients that has your entire financial life in one place and tracks your net worth as well. Whatever you use, tracking net worth is going to be a helpful exercise as you get closer to retirement.
If you have questions about retirement planning, investing, income planning, or even taxes around retirement, please reach out to me for a phone call. I’d be happy to have a call with you if there’s time available.
In this post I’m going to share an example of one of the risks that we face in retirement when doing retirement planning.
Recently, I talked to a couple who is moving from the accumulation or saving stage to the distribution stage. They’re getting ready to retire soon, hopefully this year. And they just wanted to make sure that they had a solid plan. They’re thinking through all the different possibilities, outcomes, and scenarios that could play out for them in their life. They’re in their sixties, they have a little bit over a million saved right now, and they can live off of about $6,000 per month. This amount is reasonable for base-level expenses.
Watch out for the Single-Investment Risk
Things look pretty good with their plan, but there’s one thing that sticks out that could be a risk. There are usually a few major risks for any plan. In this particular scenario, the problem is a single-stock risk or single-investment risk. Of the million dollars they have saved, about 40% is in one stock. It’s a high-flying stock that gets a lot of news coverage and it’s really worked out well for them. Now it could continue to go up, but that’s quite a high percentage to have in one single stock. Because it has a high profile, it could be adversely impacted by a piece of news or competition or some sort of regulation.
In the video above, I’ll show you an example of what sort of impact this could have on a plan. You’ll see that if this high-profile stock, that has about $440,000 in it, takes a 50% correction (when the average is between 4 and 6%) it can have a huge impact on the rest of their retirement plan. Even if there’s a slow and steady recovery, the difference is noticeable.
So that’s just one thing to be aware of when it comes to investing and your income plan. Even your tax plan could be impacted, because of the capital gains that are associated with this single stock risk. It’s more about predictability and sustainability than it is about growth. If you have a successful plan where you don’t need to take that level of risk, then why not make it a little bit more predictable with, hopefully, a few less fluctuations.
If you have questions about this scenario, or about the right type of mix or allocation, click here to set up a time to talk with me.
Recently I met with a couple who is retiring this year and we’re setting up their retirement income withdrawal strategy. One of the accounts that’s a part of their strategy is a non-retirement account.
What is a Non-Retirement Account?
This is a common type of account with ETFs or funds or stocks. It could really contain any type of investment when any interest or dividends that are created that year are taxed that year as well. When an investment is sold, it’s either sold because it went up in value and there’s a gain that you pay tax on, or it went down in value and there’s a loss that you might be able to write off on your taxes.
So in the situation with the retiring couple, a lot of their investments had a long-term gain tied to them. For example, they bought one individual fund for $50,000 and now it’s worth $100,000, which is great! But if they sold it to help fund their retirement income plan, they’d end up paying $7,500 to $10,000 in taxes on that single fund that had appreciated. Over the course of a few years, it could really add up to quite a bit that they’d have to pay in tax. And in retirement, for them, every dollar matters, just like for you, every dollar matters. So implementing a tax-saving strategy helps make a big difference in the success of their plan and maybe yours, too.
The other key in this scenario is that the couple is charitable and they want to continue to give. They plan to give between $5,000 and $10,000 a year during retirement. Usually they give cash and they give it straight to the charities of their choice – in this case, they give to their church.
Now here’s the idea that we thought about. What if rather than give cash, instead we move the money to a donor-advised fund.
What is a Donor-Advised Fund?
A donor-advised fund is technically out of your estate, but it’s still under your control. You can designate the money to go to different charities when and how much you want. You can even give to multiple charities out of the same fund and set up monthly giving, just as you would from your cash account.
With this couple, we looked at their non-retirement account and inside, there were all these different funds and ETFs. From the fund that had appreciated from $50,000 to $100,000, we took $10,000 and moved that to a donor-advised fund. Once they have a lump sum in, they set up autopilot to send a certain amount monthly to the church. Now instead of paying $1,500 to $2,000 in taxes every year, they pay zero tax on that transaction. Continuing to give monthly to the church, rather than one large donation, helps the church to budget as well.
To sum up: the couple gives to their donor-advised fund. Charitable giving is set up on autopilot. The church gets the same amount, at the same time, that they were always going to receive. All in all, the only person who gets cut out of this scenario is Uncle Sam.
This is just one example of how your five mini plans make up a much larger retirement plan and how they must work together to see great success. In this case, it was the income plan, the investment plan, the tax plan, and also the legacy plan – the legacy and charitable plan working together.
If you’re getting close to retirement, here are some other links that may be helpful to you: